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Ecomomics evelopment 10th y p todaro and smith chapter 10

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

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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
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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

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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

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10-7


Population Growth and
Environment


Rapid population growth put pressure on natural resources:

– Clean air
– Arable land
– Safe drinking water
– Forests
– Mineral deposits
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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
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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
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Wesley. All rights reserved.

10-10


Private Property Rights
Perfect private property rights require:
• Universality: all resources are privately owned
• Exclusivity: owner prevents others from using
resources
• Transferability: owner can sell resources when
desired
•Copyright
Enforceability:
owner
receives all benefits
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AddisonWesley. All rights reserved.

10-11


Environment and Development:
The Basic Issues


Sustainable development and environmental accounting



Population, resources, and the environment



Poverty and the environment



Growth versus the environment



Rural development and the environment

Copyright © 2009 Pearson AddisonWesley. All rights reserved.

10-12


Private Property Rights
Perfect private property rights require:
• Universality: all resources are privately owned
• Exclusivity: owner prevents others from using
resources
• Transferability: owner can sell resources when
desired
• Copyright
Enforceability:
owner
receives all benefits
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AddisonWesley. All rights reserved.

10-13


Economics of the Environment
Free market transactions achieve stable
equilibrium, benefiting



Consumer through the creation of a consumer surplus



Producers through the creation of a producer surplus

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10-14


Economics of the Environment
Supply

Price

Consumer Surplus

Marginal Cost

P

Producer Surplus or Scarcity Rent

Demand
Q

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Quantity

10-15


Optimal Resource Use

Resource conservation results in a



Higher future price



Greater producer surplus

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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

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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

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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 = 0
AP*

C

W

D

E

Wage
Marginal Product of Labor
Average Product of Labor

L*

Lc

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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.
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2009 Pearson
AddisonHence,
it is©subject
to decay.
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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

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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*

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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 do not pay for the cleaning cost

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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
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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

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10-25


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