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Lecture 22:

The Environment and

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

NNP*: sustainable net national product
Dm: depreciation of manufactured capital assets
Dn: depreciation of environmental capital:
monetary value of environmental decay over a
R: expenditure required to restore environmental
capital (forests, fisheries etc.)
A: expenditure required to avert destruction of
environmental capital

Population, Resources, and the

Perception that there is a limited population size
which can be sustained with the earths finite
Potential for new technologies may alleviate the
strain on the resources
Growing populations in the LDC have led to land,
water, and wood shortages in rural areas, and
sanitation and water in urban areas
Increasing populations contributes to accelerated
degradation of resources

Poverty and the Environment

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
Increasing consumption while keeping
environmental degradation low is difficult

Rural Development and the

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

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
Trade-offs between output and environmental
improvements will be necessary

The Scope of Environmental

challenges in
developing countries
will be caused by
These are common
where households lack
economic alternative
to unsustainable
patterns of living

These include health

hazards created by:
Lack of access to
clean water and
Indoor air pollution
Severe soil

Principal Health and Productivity

Consequences of Environmental Damage
See Todaro: Ch. 11
Table 11.1

Water pollution and
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

Traditional Economic Models 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

Optimal Resource
Allocation Over Time (11.2)
Price of a good that is
being rationed intertemporally must equate the
present value of the
marginal net benefit of the
last unit consumed in each
Indifferent between
obtaining the next until
today or tomorrow
Efficient allocation of
resources over time must
allow for scarcity rent 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
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