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Lecture 22:The Environment and

Development Economics and the Environment

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Environment and Development: The Basic Issues

• The concept of sustainable development, and linkages between the environment

• Sustainability: a development path is sustainable ‘if and only if the stock of overall capital assets remains constant or rises over time’

• Environmental accounting: the preservation or loss of valuable environmental resources should be factored into estimates of economic growth and well-being

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• NNP* =GNP –Dm –Dn – R –A• NNP*: sustainable net national product• Dm: depreciation of manufactured capital assets• Dn: depreciation of environmental capital:

monetary value of environmental decay over a year

• R: expenditure required to restore environmental capital (forests, fisheries etc.)

• A: expenditure required to avert destruction of environmental capital

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Population, Resources, and the Environment

• Perception that there is a limited population size which can be sustained with the earth’s finite resources

• Potential for new technologies may alleviate the strain on the resources

• Growing populations in the LDCs have led to land, water, and wood shortages in rural areas, and sanitation and water crisis in urban areas

• Increasing population contributes to accelerated degradation of resources

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Poverty and the Environment

• There exists a relationship between environmental destruction and high fertility which are both out growths of absolute poverty

• Preventing environmental degradation is linked to providing institutional support to the poor

• Insecure land rights, lack of credit and inputs and absence of information often prevent poor from marking resource augmenting investments which would help preserve the environment

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Growth versus the Environment

• Question of whether or not it is possible to achieve growth without environmental damage

• The worst environmental damage by the richest billion and poorest billion of the world

• Therefore idea that increasing incomes of the poor would decrease environmental damage

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Rural Development and the Environment

• Growing LDC populations will require food production in LDCs to double by 2010

• Land in LDC are already being overworked by the existing population

• Increased accessibility of agricultural inputs and introduction of sustainable methods of farming are need to decrease destructive patterns of land use

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Urban Development and the Environment

• Rapid population increase and rural-urban migration has led to increasing urban population growth

• Strain on existing urban water supplies and sanitation facilities, high costs of urban crowding

• Resulting in health hazards as circumstances allow for epidemics and health crises

• Research reveals that urban environment tends to worsen at a faster rate than urban population size increases so that the marginal environmental cost of additional residents rises over time

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The Global Environment

• As world population grows and incomes rise, net environmental degradation will worsen

• Efficient use of resources can be undertaken via population abatement technology and resource management

• Trade-offs between output and environmental improvements will be necessary

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The Scope of Environmental Degradation

• Environmental challenges in developing countries are be caused by poverty

• Poor households lack economic alternative to unsustainable patterns of living

• These include health hazards created by:

• Lack of access to clean water and sanitation

• Indoor air pollution • Deforestation• Severe soil

degradation

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Principal Health and Productivity Consequences of Environmental Damage

• See Todaro: Ch. 11 Table 11.1

• Example:

• Water pollution and scarcity

• More than 2m deaths, and billions of illnesses a year

• Effect on productivity: declining fisheries, rural household time and municipal costs of providing safe water

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Traditional Economic Model of the Environment

• Privately Owned Resources (11.1)

• Static Efficiency in Resource Allocation

• Where total net benefit is maximized when the marginal cost of producing/extracting one more unit of the resource is equal to its marginal benefit

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• Optimal Resource Allocation Over Time (11.2)

• Price of a good that is being rationed inter- temporally must equate the present value of the marginal net benefit of the last unit consumed in each period

• Indifferent between obtaining the next until today or tomorrow

• Efficient allocation of resources over time must allow for scarcity rent (green) to be collected by owner

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• Common Property Resources and Misallocation (11.3)

• Potential profits or scarcity rents will be competed away

• Misallocation or resources under a common property system

• Implication of model is the where possible privatization of resources will lead to an efficient allocation of resources

• Example: relationship between the returns to labor on a given piece of land

• Scarcity rent: Green area

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Economic Solutions

• Allow scarcity rent to be collected

• Tradable rights to pollute: – Individuals incorporate externalities

• SMC=Private marginal cost+pollution=MR

– Requires a cap to constrain individual and world wide totals

– Should all countries be required to participate