Lecture 22: The Environment and Development

Lecture 22:The Environment and Development Economics and the Environment

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

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

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

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

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

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

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

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

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 The Scope of Environmental Degradation

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 Principal Health and Productivity Consequences of Environmental Damage

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

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

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

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

Lecture 22: The Environment and Development