Addis Ababa University

College of Business and Economics

Department of Economics

Natural Resource and Environmental Economics

Individual Assignment 2
Programme:regular
Yohannes azegaj
ID No BER/1713/11
Submitted to: instructor Negash Mulatu
 ADDIS ABABA UNIVERSITY
1. According to the pessimist view, piecemeal approaches to solving individual
problems are not successful. Why?

Because there view is characterized by exponential growth coupled with fixed limits.
Resources are held in fixed supply by the model (land, delectable resources etc.) It’s based
upon the inevitability of exceeding the carrying capacity of the planet as the population and
level of economic activity grow.

If there is no major change in the physical, economic or social relationships that have
traditionally governed the world development, society will run out of nonrenewable
resources on which the industrial base depends. As this view piecemeal approaches should
not be used to solving individual problems because the removal of one limit merely causes
the system to bump subsequently into another one, usually with more dire consequences.

2. Define sustainable development?

Sustainable development is the idea that human societies must live and meet their needs
without compromising the ability of future generations to meet their own needs. 

There are four dimensions to sustainable development – society, environment, culture and
economy – which are intertwined, not separate. Sustainability is a paradigm for thinking
about the future in which environmental, societal and economic considerations are balanced
in the pursuit of an improved quality of life. For example, a prosperous society relies on a
healthy environment to provide food and resources, safe drinking water and clean air for its
citizens. 

Sustainable development is defined as “development that meets the needs of the present
without compromising the ability of future generations to meet their own needs.” The
concept of needs goes beyond simply material needs and includes values, relationships,
freedom to think, act, and participate, all amounting to sustainable living, morally, and
spiritually.

It is an organizing principle for meeting human development goals while simultaneously

sustaining the ability of natural system to provide the natural resource and ecosystem upon
which the economy and society depends.

3. Economic growth does not cause environmental problem! Argue for or against the
motion.

I argue against the motion.

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Economic growth means an increase in real output (real GDP). Therefore, with increased
output and consumption we are likely to see costs imposed on the environment. The
environmental impact of economic growth includes the increased consumption of non-
renewable resources, higher levels of pollution, global warming and the potential loss of
environmental habitats.

Using PPFcurve let me show you Classic trade-off between economic growth and
environmental resources

This PPF curve shows a trade-off between non-renewable resources and consumption. As
we increase consumption, the opportunity cost implies a lower stock of non-renewable
resources.

For example, the pace of global economic growth in the past century has led to a decline in
the availability of natural resources such as forests (cut down for agriculture/demand for
wood)

 A decline in sources of oil/coal/gas

 Loss of fishing stocks – due to overfishing

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  Loss of species diversity – damage to natural resources has led to species
extinction.

4. Human population is virtually at the root of all the world’s environmental

problems. Argue for or against the motion.

I argue for the motion

Population is one of the drivers of the environmental crisis and underlies almost every
environmental problem.

And also impact the physical environment in many ways: overpopulation, pollution, burning
fossil fuels, and deforestation. Changes like these have triggered climate change, soil
erosion, poor air quality, and undrinkable water. These negative impacts can affect human
behavior and can prompt mass migrations or battles over clean water.

 Generally Man is inexorably changing the face of the Earth and weather patterns in
directions which could have all manner of widespread ill-effects, and already have had some
catastrophic local ones. Yet more and more of the world's productive lands are being paved
with concrete, and the productivity of even wider areas is being permanently lost through
erosion and laterization following the clearing of forests and other binding vegetation.
Simultaneously, many strains of crop plants are being lost which are essential to humanity
because they enable plant breeders to develop new agricultural varieties to help keep
abreast of changes in pests and weather, and to raise production levels.

5. Why the environment is viewed as composite asset?

The environment is a very special asset because it provides the life support system, i.e.
sustains existence of living things. Therefore it is very important to prevent unnecessary
deterioration of the value of the asset so that it continues to provide life-sustaining services.

6. Are you optimistic or pessimistic about the future? Briefly discuss your opinion.

Believe it or not, I'm very optimistic about our future as a species. Why? Because we can
offset some of the damage we’ve done, and keep the situation from getting worse. Of course
it won’t happen overnight; it may take several generations. And we can’t afford to be
complacent. But we’re not helpless. We’re not powerless. We’re not doomed. That dismal
mindset won’t achieve anything. We can slow down change, and have a big say in designing
the kind of planet we want and need to survive. I’m not by any means dismissing the risks
we face in the coming decades. But I also derive hope from stepping back and marveling at
the human species, warts and all. Human beings are imaginative, strong-willed problem
solvers. We've already proven that we can change the world—not with good results. We
have the talent and technologies to change it again, this time on purpose and for the better.

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7. Discuss very briefly the major global environmental challenges and threats

Pollution

It is one of the main causes of an environmental issue because it poisons the air, water, soil,
and noise. As we know that in the past few decades the numbers of industries have rapidly
increased. Moreover, these industries discharge their untreated waste into the water bodies,
on soil, and in air. Most of these wastes contain harmful and poisonous materials that
spread very easily because of the movement of water bodies and wind.

Greenhouse Gases

These are the gases which are responsible for the increase in the temperature of the earth
surface. This gases directly relates to air pollution because of the pollution produced by the
vehicle and factories which contains a toxic chemical that harms the life and environment of
earth.

Climate Changes

Due to environmental issue the climate is changing rapidly and things like smog, acid rains
are getting common. Also, the number of natural calamities is also increasing and almost
every year there is flood, famine, drought, landslides, earthquakes, and many more
calamities are increasing.

Deforestation

We need plants and trees to survive. They provide oxygen, food, water and medicine for
everyone, all over the globe. But if deforestation continues at the rate it’s occurring, we
won’t have much of the valuable forestry left.

With natural wildfires, illegal logging and the mass amount of timber being harvested for
commercial use, our forests are decreasing at an alarming rate. As well as reducing our
supply of oxygen, the loss of forests is contributing around 15% of our greenhouse gas
emissions.

Soil Degradation

Globally, food security depends on the factor whether or not soils are in good condition to
produce crops. According to UN estimates, about 12 million hectares of farmland a year get
seriously degraded.

Soils get damaged due to many reasons. Such reasons include erosion, overgrazing,
overexposure to pollutants, monoculture planting, soil compaction, land-use conversion and
many more.

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Global Warming

Climate changes like global warming are the result of human practices like the emission of
greenhouse gases. Global warming leads to rising temperatures of the oceans and the earth’
surface causing natural disasters that include flooding, melting of polar ice caps, rise in sea
levels and also unnatural patterns of precipitation such as flash floods, hurricanes, wildfires,
drought, excessive snow or desertification.

Overpopulation

The population of the planet is reaching unsustainable levels as it faces a shortage of

resources like water, fuel and food. Population explosion in less developed and developing
countries is straining the already scarce resources.

Intensive agriculture practiced to produce food damages the environment through the use
of chemical fertilizer, pesticides and insecticides. Overpopulation is also one of the crucial
current environmental problems.

Loss of Biodiversity

Human activity is leading to the extinction of species and habitats and loss of biodiversity.
Ecosystems, which took millions of years to perfect, are in danger when any species
population is decimating.

8. What is the difference between the mediating – factor approach and development
–dependency approach of environmental analysis?

The mediating-factor approach: This is a method which postulates that not only the
magnitude but also the direction (sign) of the effect of population on the environment is
determined by other factors, such as poverty, market demands, government policies, and
social and cultural factors. These conditions and factors determine whether population
growth would lead to technological innovation or to environmental degradation or out-
migration

The development-dependency approach: This method of analysis advocates that it is the

development process that mediates the population-environment interface. In particular, the
dependency of the South or the North on export markets for natural resources, technology,
foreign investment and a variety of other international economic and political dependencies
shape both the observed demographic and environmental outcomes. In this approach,
population growth and environmental degradation are spuriously (rather than causally)
related, both being driven by a third factor, the South-North development dependency

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9. What is the limitation of system national accounts (SNA) regarding the
environment?

System of national accounts (SNA)is facilitating the development of indictor and analysis on
economy- environment nexus. And have some limitation which should have improved.

 Have shortage in terms of accuracy, timeliness or coherence and capturing

globalization.
 It also use gross domestic product (GDP) as a single number to summarize what is
happing in the economy.
 Does not present a number of initiatives to complement traditional national accounts
indicators in order to be able combine environmental, economic and social measures.
It is only include market transaction.
 SNA does not take into account the depletion (or growth) of stocks of environmental
resources, and it does not deduct from income an allowance for the loss of welfare
experienced by households as a consequence of environmental degradation
10.Explain the property right principle of sustainable development and resource
management.

Property rights refer to a bundle of entitlements defining an owner’s rights, privileges and
limitation to use of a resource. The poverty eradication, changing consumption and
production pattern, and protecting and managing the natural resource base for economic
and social development are overarching objectives of, and essential requirements for
sustainable development. Economic systems based on property rights and rule of law are
the best hope for humanity today to leave an endowment for humanity tomorrow.

The stronger the property right system, the better the economy is at efficiently allocating
resources and expanding wealth creating opportunity and gives the exclusive right to
owners to use their resources as they fit and to voluntarily transfer them. The establishment
and vesting of property rights over a resource is a more efficient means of management
than open access. Protection of property rights are important because it helps the economy
deal with the issue of resource scarcity by ensuring its use is controlled through ownership.

11.List down the characteristics of efficient property rights structures.

The concept of efficiency of property rights takes into account the cost of negotiating right,
the cost of policing, the cost of establishment and the cost of litigation the set of property
rights which minimizes these costs is an efficient set. The characteristic of property right are
of key importance in the way the resource is managed by right holder. Some characteristic
of efficient structure of property rights is

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  Exclusivity– all the cost and benefits from owning a resource should accrue to
the owner
 Transferability _ all property right should be transferable from one owner to
another in a voluntary exchange.
 Flexibility _ the extent to which the owner can change the mode or purpose of
resource use without forfeiting the right.
 Enforceability_ property rights should be secure from seizure or
encroachment by others.
 Divisibility_ the ability to create joint ownership, to divided the asset spatially
or by function, to construct temporal succession of rights.
 Duration _ permanence, length and arrangement for renewal.
12.Explain in detail the following terms or concepts (use graphs or equations where
appropriate);
Market failure is the economic situation defined by an inefficient distribution of goods
and services in the free market. In market failure, the individual incentives for rational
behavior do not lead to rational outcomes for the group.

In other words, each individual makes the correct decision for him or herself, but those
prove to be the wrong decisions for the group. In traditional microeconomics, this can
sometimes be shown as a steady-state disequilibrium in which the quantity supplied
does not equal the quantity demanded.

Types of market failure

_ Productive and allocate inefficiency._ Monopoly power

_ Missing markets_ incomplete markets

_ De-merit goods_ Negative externality

Policies to overcome market failure

 Taxes on negative externalities.

 Subsides on positive externalities.
 Laws and regulations.
 Electronic road pricing -: a specific tax related to congestion.
 Pollution permit -: giving firms the ability trade pollution permits.
 Advertising -: government campaigns to change people’s preferences.

Free Rider Problem

 This occurs when people can benefit from a good/service without paying anything
towards it.

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  It also occurs, if people can get away with making only a token contribution
(Something less than their overall benefit)
 If enough people can enjoy a good without paying for the cost – then there is a
danger that, in a free market, the good will be under-provided or not provided at all.
 The free-rider problem is common with public goods – goods with non-excludable
benefits, e.g. if you reduce pollution, everyone in society will benefit. Once pollution
is reduced – everyone has to benefit.

Tragedy of commons

The tragedy of the commons is an economics problem in which every individual has an
incentive to consume a resource, but at the expense of every other individual -- with no way
to exclude anyone from consuming. Initially it was formulated by asking what would happen
if every shepherd, acting in their own self-interest, allowed their flock to graze on the
common field. If everybody does act in their apparent own best interest, it results in harmful
over-consumption.

The tragedy of the commons is a very real economic issue where individuals tend to exploit
shared resources such that the demand greatly outweighs supply, and subsequently the
resource becomes unavailable for the whole.

Coase theorem: - Theorem states that under ideal economic conditions, where there is a
conflict of property rights, the involved parties can bargain or negotiate terms that will
accurately reflect the full costs and underlying values of the property rights at issue,
resulting in the most efficient outcome.

As we can see from the graph below, we have a negative externality, the fertilizer use on the
x-axis. On the y-axis, we have the marginal effect of the externality on both parties. The
reason both lines are downwards sloping is that there comes a point where adding extra
fertilizer into the river cannot do any more damage than it already has. At the same time, the
marginal benefit slope goes to Q2 which refers to the point where there is no additional
benefit to the farmer of using more fertilizer.

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Hoteling’s rule: - defines the net price path as function of time while maximizing economic
rent in the time of fully extracting a non- renewable natural resource. The maximum rent
also known as hotelling rent or scarcity rent and this rent could be obtained while emptying
the stock resource. This concept was the result of analysis of non-renewable resource
management by Harold Hotelling.

Assumptions:

1. Suppose a private owner owns the complete stock of a natural resource.

2. The complete stock of the resource is fully known and there is no more.
3. Once some of the stock is withdrawn, the resource withdrawn is used completely
with no waste and nothing left over for reuse.
4. The stock can never regenerate itself.
5. The cost of withdrawing a unit of the resource is always the same (to make things
really simple, we will assume the cost of extraction is $0).
6. There are no alternatives to the resource.

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The simple can be expressed by the equilibrium situation representing solution.

p' ( t )
=δ
p (t)
When p (t) is the unit profit at time t and δ is the discount rate.

Hart wick's rule defines the amount of investment in produced capital (buildings, roads,
knowledge stocks, etc.) that is needed to exactly offset declining stocks of non-renewable
resources. This investment is undertaken so that the standard of living does not fall as
society moves into the indefinite future. In a given a degree of substitutability between
produced capital and natural resources, one way to design a sustainable consumption
program for an economy is to accumulate produced capital sufficiently rapidly so that the
pinch from the shrinking exhaustible resource stock is precisely countered by the services
from the enlarged produced capital stock.

References

 www.elibrary.imf.org
 Teacher hand outs
 Ocw.mit.edu
 www.google.com

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