Transcript Fundamentals of the Economics of Environmental Resources

Fundamentals of the Economics
of Environmental Resources
The Optimal Trade-off between
Environmental Quality and Economic
Goods
Waste Assimilative Capacity: three key
factors
• First, like anything else in nature, the waste
assimilative capacity of the environment is
limited. Thus, the natural environment
cannot be viewed as a bottomless sink.
With respect to its capacity to degrade
waste the natural environment is, indeed, a
scarce resource.
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• Second, the assimilative capacity of the
natural environment depends on the
flexibility of the ecosystem and the nature
of the waste.
– Degradable pollutants (municipal waste)
– persistent or stock pollutants (toxic waste)
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• Third, the rate at which the waste is
discharged greatly affects the ability of the
environment to degrade residuals. The
implication of this is that pollution has a
cumulative ecological effect--i.e.; pollution
reduces the capacity of an environmental
medium to withstand further pollution.
Lessons from the Simple Model:
W=f(X,t)
• The natural environment has a limited capacity
to degrade waste.
• A certain minimum amount of economic goods
can be produced without causing damage to the
natural environment. Thus, zero pollution not
only is a physical impossibility, but even on
purely ecological considerations, it is an
unnecessary goal to pursue.
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• Although the above simple model does not
adequately capture this, the cumulative
effect of waste discharge into the natural
environment is nonlinear. This is because
pollution tends to reduce the capacity of an
environment to withstand further pollution.
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• The ecological threshold of economic
activity (Xo in Figure 5.1) can be
augmented by technological means.
Conditions for Clearly Defined
Ownership Right
• First, the ownership rights of the resource
are completely specified.
• Second, the rights are completely exclusive
so that all benefits and costs resulting from
an action accrue directly to the individual
empowered to take actions.
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• Third, the ownership rights of the resource
are transferable. In other words, resources
can be exchanged or simply donated at the
“will” of the owners.
• Finally, ownership is enforceable. That is
the ownership of resources is legally
protected.
Implications of Commonly
Owned Resources
• First, for the commons, economic pursuit on
the basis of individual self-interest would
not lead to what is best for society as a
whole. In other words, the principle of
Adam Smith’s “invisible hand” would be
violated.
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• Second, if tragedy is to be averted, the use
of commons needs to be regulated by a
“visible hand.”
Environmental Externalities and
Their Economic Consequences
• Externality is defined as conditions arising
when the actions of some individuals have
direct (negative or positive) effects on the
welfare or utility of other individuals, none
of whom have direct control over the
activity.
• Examples: The avid gardner and the fish
hatchery cases.
• The Root Causes of Environmental
Externalities:
– Lack of exclusivity (non-exclusiveness) for the
following reasons:
• the good is non-rival
• the transaction cost is high
• the resource is commonly owned
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• The economic consequences of Externality:
– In the presence of real externalities, there will
be a divergence between private and social
evaluations of costs and benefits.
– This would cause what economist recognize as
market failure.
MSC = MPC + MEC
$
T
S = MPC
S
Ps
Pe
U
MEC
R
D = MPB = MSB
0
Qm
Qs Qe
Paper (tons)
Figure 3.3 Social optimum in the presence of externality: the case of a
hypothetical paper industry. Social optimum is attained when MSC =
MSB and this does not coincide with the intersection point of the demand
and the supply curves. The reason for this is the divergence between the
marginal private cost (the ordinary supply curve) and the marginal social
cost—which explicitly accounts for the cost of externality.
Final Lesson
• In the presence of an externality, resource
allocation through the guidance of a freemarket system would lead to inefficiency.
More specifically, because the market lacks a
mechanism by which to account for external
costs, it tends to favor more production of
goods and services from industries inflicting
damage to the natural environment. Thus, the
presence of real externality creates a
misallocation of societal resources.