Chapter 10 The Environment and Development Copyright © 2009 Pearson Addison-Wesley All rights reserved Economics and the Environment • Environmental issues affect, and are affected by, economic development • Poverty and ignorance may lead to non-sustainable use of environmental resources • Environmental decay and global warming are serious issues we face today Copyright © 2009 Pearson AddisonWesley All rights reserved 10-2 National Income Accounting • GDP (or GNI) is the market value of final goods and services • GDP (or GNI) excludes the externalities of production and consumption – Negative externalities: costs imposed on the environment and third parties; e.g., air pollution, land contamination Copyright © 2009 Pearson AddisonWesley All rights reserved 10-3 Reasons for Environmental Decay • The common property right over the environment – No one has private property rights over the environment being polluted (e.g., air, ocean water) • The collectively consumed nature of the environment – Benefits received by all users – No one can be excluded from using it Copyright © 2009 Pearson AddisonWesley All rights reserved 10-4 Adjustment for Environmental Decay • To adjust for the negative externalities find the “sustainable” Net National Income as NNI* = GNI – Dm – Dn – R – A where – Dm = depreciation of physical capital – Dn = depreciation of environmental capital – R = expenditures required to restore environmental capital – A = expenditures required to avert destruction of environmental capital Copyright © 2009 Pearson AddisonWesley All rights reserved 10-5 Causes of Environmental Decay • Poverty • Rapid population growth • Rapid urbanization • Affluence & excess consumption • Industrial production • Use of chemical inputs • Relaxed environmental laws and weak law enforcements Copyright © 2009 Pearson AddisonWesley All rights reserved 10-6 Poverty and Environment • Poverty and lack of development policies would force the people to overuse natural resources: – Cultivate the land without fertilization – Cut the trees for fuel – Contaminate the water – Pollute the air Copyright © 2009 Pearson AddisonWesley All rights reserved 10-7 Population Growth and Environment • Rapid population growth put pressure on natural resources: – Clean air – Arable land – Safe drinking water – Forests – Mineral deposits Copyright © 2009 Pearson AddisonWesley All rights reserved 10-8 Urbanization and Environment • Rapid urbanization and relaxed environmental laws result in environmental degradation: – Air pollution from fossil fuel consumption – Congestion and noise pollution – Water contamination – Relaxed emission control policies Copyright © 2009 Pearson AddisonWesley All rights reserved 10-9 The Global Environment • Consumption patterns of the very poor and very rich • Global warming and rising sea level • Rapid population growth, poverty, and income inequality in LDCs • Rapid deforestation due to pollution and commercial development • Rapid desertification due to lack of rural Copyright © 2009 Pearson Addisondevelopment Wesley All rights reserved 10-10 Optimal Resource Use Resource conservation results in a • Higher future price • Greater producer surplus Copyright © 2009 Pearson AddisonWesley All rights reserved 10-16 Optimal Resource Use Price Ps P By reducing consumption from 75 to 50, price goes up to PS and producer surplus increases by PSPab a MC b Demand 50 75 Copyright © 2009 Pearson AddisonWesley All rights reserved Quantity 10-17 Common Property Rights • When a scarce resource (e.g., land) is publicly owned and thus freely available to all users (e.g., farming or grazing animals) • Any potential benefit (i.e., producer surplus or scarcity rent) will be competed away as more people use the resource Copyright © 2009 Pearson AddisonWesley All rights reserved 10-18 Common Property Rights Initial employment is L*, where MPL = W and PS = AP*CDW Return to labor As more workers use the land, MPL < W and PS declines At LC, MPL is very small, AP = W, and PS = AP* C W D E Wage Marginal Product of Labor Average Product of Labor L* Lc Copyright © 2009 Pearson AddisonWesley All rights reserved No of Workers 10-19 Public Goods and Environment Public or collectively consumed good • Provides benefits to all users • Its availability won’t diminish as others use it simultaneously • Is produced by the government • Is subject to the “free-rider” problem The human environment is collectively consumed Copyright 2009 Pearson AddisonHence, it is©subject to decay Wesley All rights reserved 10-20 Demand for Public Goods • Aggregate demand is the “vertical” summation of individual user demands • Cost of providing the good to the society is greater than the individual users’ costs Copyright © 2009 Pearson AddisonWesley All rights reserved 10-21 Demand for Public Goods A+B Price Q* = Qa + Qb; Pa < Pm; Pb < Pm B Aggregate Demand A c Pm Pb b MC Aggregate Supply a Pa Qa Qb Q* Copyright © 2009 Pearson AddisonWesley All rights reserved Quantity 10-22 Negative Externalities • When consumption or production inflicts damages on third parties (e.g., air pollution generated by using private automobiles) • The good whose production pollutes the environment is over-produced, but under-priced if producers not pay for the cleaning cost Copyright © 2009 Pearson AddisonWesley All rights reserved 10-23 Negative Externalities Price MCS MCP a P* PM PC Supply b Dead-Weight Loss = abc c Demand Q* QM Quantity MCS>MCP: QM > Q* and PM < P* where Q* and P* = “socially optimum” price and quantity; M and PMAddison= “market” price and quantity Copyright © 2009 QPearson Wesley All rights reserved 10-24 Environmental Decay • As the demand for the good increases due to – Economic growth – Population growth • The “market” price and quantity will further diverge from the “socially optimum” price and quantity Copyright © 2009 Pearson AddisonWesley All rights reserved 10-25 Environmental Decay Price P2 MCS MCP P* P1 D1 D2 Quantity Q* Q1 QM Copyright © 2009 Pearson AddisonWesley All rights reserved 10-26 Environmental Policies, LDCs LDCs must improve the environment: • Proper resource pricing to include externalities: impose pollution taxes and standards • Community involvement: education, recycling • Private property rights and resource ownership Copyright © 2009 Pearson AddisonWesley All rights reserved 10-27 Environmental Policies, LDCs LDCs must improve the environment: • Programs to improve alternatives to the poor • Improve the economic status of women • Establish industrial emission abetment policies Copyright © 2009 Pearson AddisonWesley All rights reserved 10-28 Environmental Policies MDCs must help LDCs improve the environment: • Trade policies, reducing trade barriers • Debt relief to reduce the financial burden • Development assistance to improve the environment Copyright © 2009 Pearson AddisonWesley All rights reserved 10-29 Environmental Policies MDCs must help improve the global environment: • Emission control • Research and development • Import restrictions Copyright © 2009 Pearson AddisonWesley All rights reserved 10-30 ... c Demand Q* QM Quantity MCS>MCP: QM > Q* and PM < P* where Q* and P* = “socially optimum” price and quantity; M and PMAddison= “market” price and quantity Copyright © 2009 QPearson Wesley All... commercial development • Rapid desertification due to lack of rural Copyright © 2009 Pearson Addisondevelopment Wesley All rights reserved 10- 10 Private Property Rights Perfect private property rights... optimum” price and quantity Copyright © 2009 Pearson AddisonWesley All rights reserved 10- 25 Environmental Decay Price P2 MCS MCP P* P1 D1 D2 Quantity Q* Q1 QM Copyright © 2009 Pearson AddisonWesley