You are on page 1of 45

ECO 2360: An Int.

to Environmental
and Resource Economics

Mohammad A. Ashraf
Associate Professor and Former Head
Department of Economics
United International University
Chapter 1: Visions of the Future
The Self-Extinction Premise
• About the time (?) the American colonies won independence,
Edward Gibbon (1737 -1794) wrote his book, The History of
the Decline and Fall of the Roman Empire (5th Century), 6
vol.(1776-1788): A tale extended from the 2nd Century AD to
the Fall of Constantinople
(Byzantium>Constantinople>Istanbul) in 1453.
What could cause the demise of such a powerful society?
Gibbon answered: The seeds for Rome’s destruction were sown
by the Empire itself.
The premise that societies can germinate the seeds of
their own destruction has long been fascinated
scholars. Among them, Thomus Malthus is very
prominent and highly influential to note.
• In 1798, Thomas Malthus published his treatise, An
Essay on the Principle of Population.
Malthus foresaw a time when popn growth will
exceed food supply. This shortage of food will raise
human hunger, starvation and death.
• In his view: Mother Nature would adjust itself which
is called self-adjusting mechanism.
• This adjustment mechanism would rather involve
rising death rates caused by environmental
catastrophes than either by “innovation” or “self-
• Generally our society seems remarkably robust
surviving wars and natural calamities, while
surprisingly increasing living standards and life
expectancy. Yet, actual historical instances suggest
that Malthus’ “self-extinction vision” may have merit.
• Historical Examples: The Mayan Civilization &
Easter Island.
• Thus, according to Malthus:
Future societies will be confronted by two ways:
(i) Resource Scarcity
(ii) Environmental Constraints
Future Environmental Challenges

• These challenges are primarily categorized in:

(i) Pollution Problem (e.g. Climate change)
(ii) Resource Scarcity (e.g. Water access)
Climate Change
• Greenhouse Effect (GE):
Energy from the propels the earth’s weather and
climate. Incoming rays heat the earth’s surface,
radiating energy back into space. Atmospheric
“greenhouse” gases (such as water vapor, CO2 and
other gases) trap some of the outgoing energy.
Without this GE, temp. on the earth would be much
lower than they are now and life would be
• “To have too much of a good thing” is good!!
In Economics, we say: “more is better”
However, this argument is not valid here,
because problems arise when the concentration
of “G” gases increases beyond the normal level
Thus, retaining excessive heat somewhat like a
car with its windows closed in the summer.
 Global warming
Since the “Industrial revolution” “G” gas emissions
have increased considerably. These increases have
enhanced the heat- trapping capability of the earth’s

According to IPCC( Intergovernmental Panel on

Climate Change) in 2007:
“Warming of the climate system is unequivocal”
That study concludes that
“most of the warming over last 50 years is
attributable to human activities”
Genesis of the problem:
• As the earth warms, rising heat situations into
extreme are believed to influence both human health
and ecosystems. Much damage to humans is seen to
cause directly by rising heat, as observed by the heat
waves that outcome in thousands of deaths in Europe
in the summer of 2003.
• Human health can also be affected by pollutants, such
as smog, that are exacerbated (worsened) by warmer
temperatures. Rising sea levels (as warmer water
expands and previously frozen sources such as
glaciers melt), coupled with an increase in storm
intensity have potentials to flood coastal
Ecosystems will be subjected to unusual and
unaccustomed temperatures:

- Some will adapt by migrating to new areas,

- but others may not be able to adapt in time.
While these processes have already commenced, they
will intensify slowly throughout the century.

Who is responsible?
- developing countries/ developed world?
- who is the hardest bit?
• It will require a coordinated global response.
The problem is world system – “nation – state” system
which is supreme and international cooperation is
relatively weak.
Example: “Bangladesh – India relationship”
Water accessibility
Another threat is loomed by the interaction of an
increasing demand for resources in the face of a
finite supply. For instance, “water” which is vital
to life.
According to the UN:
About 40% of the world’s population lives in
areas with moderate – to - high water stress.
Moderate: >20% human consumption of all accessible
renewable fresh water resources.
High: >40%
It is estimated that, by 2025, about 2/3 of the world’s
population (about 5.5 b people) will live in areas facing
either moderate or high water stress.
This stress is not uniformly distributed around the
globe. For instance:
 In the USA, Mexico, China and India, groundwater is
being consumed faster than it is being replenished
and aquifer levels are steadily falling.
 Some rivers, such as the Colorado in the western
United States and the Yellow in China, often run dry
before they reach the sea.
 Glaciers that feed many Asian rivers are shrinking.
According to the UN data:
Africa and Asia suffer the most from the lack of access
to sufficient clean water.
Up to 50% of Africa’s urban residents and 75% of the
Asians lack adequate access to a safe water supply.
Human activity:
• Water is getting contaminated by human activities.
According to UN:
90% of sewage and 70% of industrial wastes in
developing countries are discharged by without
Some countries with arid areas have compensated for
their lack of water by building dam and large reservoirs.
For example:
The reservoir behind the Three Gorges Dam in China is
so vast that the pressure and weight are causing tremors
Bangladesh - India Farakkah dam and others.
Meeting the challenges
• Poverty
• Climate change
• OZONE (O3) depletion
• Loss of biodiversity
Future generations cannot speak for themselves,
the current generation must speak for them.
Global Environment Problems :
• Low – lying countries could be submerged by the
rising sea levels predicted by some climate change
• Arid nations could see their marginal agricultural
lands succumb to desertification.
How to respond Socially?

“Positive feed back loops” :

Those in which secondary effects tend to reinforce the
basic trend.
The process of capital accumulation illustrates one
positive feed back loop.
Investment greater outputs profits
can be used to fund to more additional investments.
Note: with + feedback loops the process is reinforcing.
Human responses can also intensify environment
problems through “positive feedback loops”, (PFL)
When shortages of a commodity are imminent
consumers start to hoard the commodity.

Intensify shortages

People will eat the seeds

Shortages intensify more

Spiral effect will take place

“Negative feedback loops”(NFL):
It is a theory advanced by the English Scientist Games
In his terms, it is called Gaia Hypothesis named after
the Greek concept for ”Mother Earth”,

Restore the balance

The role of Economics
It can provide an useful tools for modifying human
behavior in the face of scarcity.
 Market system resilience.
 The use of models

Simplified versions of reality

Ex. Map
Chapter 2: The Economic Approach: Property
Rights, Externalities and Environmental
The Human-Environment Relationship
The Environment as an Asset:

Air Pollution
Energy Firms: Y
Solid Waste
Air Recycling

Inputs Outputs

Raw Materials Waste Heat

Amenities Water Pollution
Economic System and Environment
The Economic Approach

There are two types of Approaches:

1. Positive Approach
2. Normative Approach
Both branches are useful.
Environmental Problem and Economic
This efficiency is static rather than dynamic.

Efficiency: Economic surplus derived from the

resources is maximized by the allocation is called static

Economic surplus: Consumer surplus + producer

So, resource allocation is important.
Property Rights
Property Rights and Market Allocations:

Property rights (PR): refer to a bundle of entitlements

defining the owner’s rights, privileges, and limitations
for use of the resources.

By examining such entitlements and how they affect

human behavior, we would better understand how
environmental problems arise from government and
market allocations.
Economic Systems

1. Capitalistic Economic System

(Market Economy)
2. Socialistic Economic System
(Planned or Command Economy)
3. Islamic Economic System
4. Mixed Economic System
(Market Economy + Planned
Economy + Islamic Economy)
Efficient Property Right Structures
The structure of property rights can produce efficient
allocations in a well-functioning market economy.
An Efficient Structure has three properties:
• Exclusivity: All benefits and costs have to be accrued to
only the owner of the resources.
• Transferability: All PRs have to be transferable from
one hand to other through a voluntary exchange.
• Enforceability: PRs have to be secure from
involuntary seizure or encroachment by others.
Is this Structure Efficient?
When well-defined PRs are exchanged, as in a market economy,
this exchange facilitates efficiency.
We can explain it by the following way:
• The seller has the right to prevent the consumer from consuming the
product in the absence of payment => The consumer must pay to receive
the product.
• On the other hand, based on a given market price, the consumer decides
how much to purchase by choosing the amount that maximizes her/his
individual consumer surplus.
 So this allocation is efficient, because producers try to maximize their
surplus in a competitive market economy.
 That means the price system allows the self-interested parties to make
choices that are efficient from the view point of society as a whole.
Scarcity rent:
The marginal opportunity cost of the resources.

Externalities as a source of market

Suppose two firms are located by a river –
One is steel industry and other is a hotel/resort.
Steel industry releases pollutions which affect the hotel/
This pollution is externality because it raises the cost to
hotel. This is termed as external cost on the resort.


P* Loss to society

Q* Qm

Figure: Market for Steel

Market Failure:
If equilibrium were at Pm level, then market would be
efficient. Here equilibrium is taken place at p* where
benefit is maximized. The steel mill is producing Qm
and taking the benefit of p* level of price.
 Market is failed for efficiency loss.
1. The output of the commodity is too large.
2. Too much pollution is produced.
3. The prices of products responsible for pollution are too low.
4. No external costs are there, so to reduce pollution would not
be sought.
5. No recycling and re use of pollution.
=> The effects of a market imperfection for one
commodity will affect the factor demand such as labor,
raw materials and so on. The ultimate effects are fell
through the entire economy.
Types of externalities
1. Positive Ext. : External economy
2. Negative Ext. : Diseconomy (pecuniary externality)

Other types of Property rights:

1. State – property: Pub. Property, owned by all, but its uses and
access are controlled by the state. Ex. National Park
2. Common – property: Collective property, owned by a group of
individuals. Access, use and exclusion are controlled by the joint owners.
3. Open access: Not owned by anybody, not excludable but rivalry.
Ex. Ocean fisheries.
4. Common – pool resources(Bison in America)
Public Goods:
Criteria –
1. Non excludability
2. Indivisible consumption
However, a competitive market would not be expected
to supply the efficient level of Public goods.

Person A

Person B

Market Demand


0 Quantity
• Marginal willingness to pay is different for each
consumer. So efficient pricing system would requare
a different price to each consumer.
• In this condition, producers would have no bases for
figuring out how to differentiate the prices.
• In the absence of excludability, no consumer would
express his/her strength of preference for this
commodity.All consumers have an incentive to
express low level of preference and to try to shift the
cost burden to the other consumer.
 Free rider
 Inefficiency results.
Imperfect market structures (monopoly)
Monopoly violates the definition of efficiency in the
goods market

Marginal cost
MR Demand
0 Quantity
Figure: Monopoly and inefficiency
CS : I G C
PS : G C H
Monopoly would produce and sell 0A where MC = MR
and charge price 0F. At this point of production,
PS = HFED which is maximized. And this is not equal
to CS + PS, because there is a dead- weight loss to
society which is equal to EDC.
 It leads to inefficiency.
Government failure
Market processes are not the only sources of
inefficiency . Political processes are fully as culpable.
What is that and how?
Govt. failures share with market failure the
characteristics that improper incentives are the root of
the problem.
Special interest groups use the political process to
engage in what has become known as “rent seeking”.
Rent seeking is the use of resources in lobbying the
political group. Successful rent seeking activity will
increase the net benefits going to the special interest
Group, but it will also lower the surplus to society as a
 Main reason : voters’ ignorance .
Rent seeking can take many forms. Producers can take
price floor to hold prices above their efficient levels.
Consumers can seek price- ceilings to transfer part of
their costs to the general body of taxpayers.

Not only that : Govt. formulates inefficient policies

having without full information.

P* A B
C (with govt. subsidy)

Q* Qp
Figure : The markets for steel (with subsidy from Govt.)

Deadweight loss without subsidy = A

Deadweight loss with subsidy = A+ B + C inefficiency
The pursuit of Efficiency
By :
• Private negotiation
• Judicial way : Law/ regulation
• Legislative and Executive way : Law/ regulation
Private Resolution through Negotiation

Negotiation is possible, if the number of affected parties

are small.
Ex. Steel firm and the downstream resort
Price MCs

Q* Qm
C + D = Bribe to steel company
If they accept :
PS = A + B + C + D
If they refuse :
PS = A + B + D
 Acceptance would be better off.
If negotiation is in practiced?
Then Court system is the answer