Introduction To Issues in Environmental Economics: Mare Sarr

Scope and Nature of Environmental Economics
Economic Development and the Environment
Introduction to Issues in Environmental Economics
Mare Sarr
School of Economics
University of Cape Town
29 June 2010
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Mare Sarr Introduction to Issues in Environmental Economics

Outline
1 Scope and Nature of Environmental Economics

Evolution of Environmental Economics
Interaction between environmental processes and the economy
Ethics, Eciency/Optimality
2 Economic Development and the Environment

Factors responsible for environmental degradation
Environmental Kutznets Curve
Discounting
Sustainability and Economic Development
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Outline


Discounting
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Scope and Nature of Environmental Economics Environmental Kutznets Curve
Economic Development and the Environment Discounting
Outline


Discounting
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Proximate and Underlying Causes
Casual empiricism suggests that it is the actions of human being
that give rise to losses in natural capital:
Forests are logged for timber or burned to convert the land for
agriculture;
Wetlands are drained to secure agricultural land, or are converted

for aquaculture;
Inland and coastal waters are polluted by industrial and municipal

sewage and agricultural run o;
Land is contaminated by toxic chemicals;
Fisheries are shed beyond the levels of their sustainable yield;
The global atmosphere is treated as a sink for greenhouse gas

emissions
But why do people behave in this way?
Observations of the acts that give rise to environmental degradation

constitutes an analysis of immediate or proximate causes.
Such analyses are essential if policy is to be devised to reverse the

loss, and identies the agents in question: farmers, logging
companies, local communities, multinational companies,
governments etc.
But analysis of why those agents behave as they do is an analysis

of the underlying or 'true' causes of environmental degradation.
Policy measures that fail to reect underlying causes are unlikely to

succeed because the underlying cause remains in being even with
the policy in place.
Suppose, there is deforestation and local communities are
responsible for damage: e.g. over-logging, taking non-timber
products at rates in excess in sustainable yield, conversion into
agricultural land.
Policy measure may be to make the forest a protected area and

deny local communities access.
Policy is unlikely to work because the local communities are now

disaected. They have not been compensated for the very real
losses of their wellbeing.
They still have an incentive to enter the forest, albeit illegally, as

they may have no alternative options available to compensate for
their lost use values.
Policy addressed proximate causes, but not underlying causes.

Addressing underlying causes involves explaining why people act as
they do.
The underlying causes that typically explain why people act in such
a way that they may destroy or degrade natural environments are:
Market failure and information
Government or intervention failure
Participatory and empowerment failures
Economic growth
Population growth
Poverty
Underlying Causes: Market Failure
We know that, given ìdeal' conditions about institutions and

behaviour, a system of markets would produce an ecient
allocation.
Actual market economies depart from the ideal conditions in various

ways, and the allocations that they produce are not ecient.
In many environmental issues are characterized by `market failures',

i.e., situations where actual conditions depart from the ideal
conditions
These market failures are often responsible for environmental

degradation.
Underlying Causes: Market FailureExternalities
An external eect, or an externality occurs
when the production or consumption decisions of one agent

have an impact on the utility or prot of another agent in an
unintended way and
when no compensation/payment is made by the generator
of the impact to the aected party
Although standard economic theory assumes away externalities,

economic behaviour does, in fact, involve external eects.
In practice consumption and production behaviour by some agents

does aect, in uncompensated/unpaid-for ways, the utility gained
by other consumers and the output produced, and prot realised,
by other producers.
Underlying Causes: Market FailureExternalities
Example: A plant produces cars (intended goods) and emits nasty
pollution (unintended goods) that aects residents of the nearby
town. If there is no environmental regulation (or compensation
scheme) that restricts emissions then plant will tend to pollute
beyond ecient level.
Externalities are a source of market failure.
If there is a benecial externality the market will produce too

little of it in relation to the requirements of allocative
eciency,
while in the case of a harmful externality the market will

produce more of it than eciency requires.
We are only concerned here with externalities in regard to

environmental pollution.
Detailed treatment of externalities will be undertaken later in the

course.
Underlying Causes: Market FailurePublic Goods
We saw earlier that absence of public goods is a condition for

market system to support an ecient allocation.
However, some of the services that the natural environment

provides to economic activity have the characteristics of public
goods.
We need to explain what public goods are, the problems that they
give rise to for markets and their implication for environmental
degradation.
Public goods dier from private goods in that they are
non-rival: many individuals can consume the same good at the

same time (clean air, recreational service of wildlife etc.)
non-excludable: it is impossible or very costly to exclude

individuals from consuming it.
Underlying Causes: Market FailurePublic Goods The
free-riding problem
For example rain forests provide many environmental services such

as capturing CO2 and releasing O2 .
Conservation rainforest is costly while the benet accrues to all.
Since public goods are non-excludable, every economic agent will

want to benet from the environmental services without paying for
conservation hoping that others will undertake the conservation.
Such behaviour results in less conservation that eciently required

and therefore results in environmental degradation
Underlying Causes: Imperfect information
The fact that agents (private and government) do not have perfect
information about the consequences of their actions may result in
environmental degradation.
Imperfect information about the future consequences of current

actions becomes particularly important in circumstances where
those actions have irreversible consequences.
Many of the consequences of decisions about environmental

resource use are irreversible. Global warming may be a case in
point.
Once developed, a natural wilderness area can hardly be returned to

its natural state: Development has resulted in fragmentation of
many natural habitats and the loss of many species originally living
in those habitats.
Underlying Causes: Government Failure
Government intervention oers the possibility of realising eciency

gains, by eliminating or mitigating situations of market failure.
For example:
regulation of pollution emissions to have polluters internalize

the cost they impose on society
provide information to agents so they can overcome imperfect

information problem
ensure public provision of public goods
However all government intervention in trying to correct market

failure is not always eective.
Underlying Causes: Government Failure & Second-Best
economies
Lipsey and Lancaster (1957) produced the general theory of the

'second best' which showed that if a distortion existed in one
market, correcting that deviation could not be assumed to improve
social welfare if there was also a deviation in another market.
In other words, the removal of one cause of market failure

(externality) by government does not necessarily result in a more
ecient allocation of resources if there remain other sources of
market failure (e.g. monopoly).
In fact things could even get worse (see illustration of the polluting
monopolist in Perman p142-143)
Underlying Causes: Government Failure
Second, government intervention may itself induce economic

ineciency. Poorly designed tax and subsidy schemes, for ex-ample,
may distort the allocation of resources in unintended ways.
For example to incentivize farmers to use more ecient irrigation

techniques and save water, Tunisian government decided to heavily
subsidize adoption of new irrigation technolgy.
Farmers used money to acquire better irrigation technique and to

increase cultivation areas so that they needed even more water than
before subsidy. The situation has led to rapid depletion of
groundwater resources.
Outline


Discounting
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Environmental Kutznets Curve Hypothesis
Can we sustain economic growth while the environment is
continually degraded? Is the environment at the terminal stage? Is
salvation just round the bend?
Scholars are divided on this issue.

Those who believe that economic growth will result in greater
environmental degradation leading to the extinction of the
human race.
Those who contend that economic development and growth
lead to improving the environment.
This debate is at the heart of Environmental Kuznets Curve (EKC)
hypothesis.
The EKC name after Simon Kuznets who had famously

hypothesized an inverted Ù'-shape relationship between
income-inequality (Kuznets, 1955).
Later economists found this hypothesis analogous to the

income-pollution relationship and popularized the phrase
The EKC hypothesis contends that pollution increases initially as a

country develops its industry and thereafter declines after reaching
a certain level of economic progress.
This implicitly suggests that environmental damage is unavoidable

in the initial stage of economic development and therefore, has to
be tolerated until the inversion eect kicks in.
Panayotou (2003) suggests the following 3 reasons for the inversion

of pollution.
1 The turning point for pollution is the result of more auent
and progressive communities placing greater value on the
cleaner environment and thus putting into place institutional
and non-institutional measures to aect this.
2 Pollution increases at the early phase of industrialization due

to the use of rudimentary, inecient and polluting industries.
When industrialization is suciently advanced, service
industries will gain prominence. This will reduce pollution
further.
3 At early stage of industrialization, the scale eect will take

place and pollution increases (Figure 2a).
Further along the trajectory, rms switching to less-polluting
industries results in the composition eect, which levels the
rate of pollution (Figure 2b).
Finally, the technique eect comes into play when mature
companies invest in pollution abatement equipment and
technology, which reduces pollution (Figure 2c).
Does the EKC Exist?
Empirical status of the EKC hypothesis is a matter of great

importance. Assessing the validity of this conclusion involves two
questions.
First, are the data generally consistent with the EKC hypothesis?
Second, if the EKC hypothesis holds, does the implication that

growth is good for the global environment follow?
Some economists take the results in the literature as supporting the

EKC for local and regional impacts, such as sulfur for example, but
not for global impacts, such as carbon dioxide for example.
Stern and Common (2001) present results that are not consistent
with the existence of an EKC for sulfur. The EKC hypothesis may
hold for some environmental impacts, but it does not hold for all.
Evidence on the EKC hypothesis
Shak and Bandyopadhyay (1992) estimated the coecients of

relationships between environmental degradation and per capita
income for ten dierent environmental indicators
Lack of clean water and lack of urban sanitation were found to

decline uniformly with increasing income, and over time.
Deforestation regressions showed no relation between income

and deforestation.
River quality tended to worsen with increasing income.
Local air pollutant concentrations, however, conformed to the

EKC hypothesis with turning points between $3000 and $4000.
Finally, both municipal waste and carbon emissions per capita

increased unambiguously with rising income.
Evidence on the EKC hypothesis
Panayotou (1993) investigated the EKC hypothesis for: sulfur

dioxide (SO2 ) nitrous oxide (NOx , ) suspended particulate matter
(SPM ) and deforestation.
The three pollutants are measured in terms of emissions per capita

on a national basis.
Deforestation is measured as the mean annual rate of deforestation

in the mid-1980s.
All the tted relationships are inverted U, consistent with the EKC
hypothesis. The turning point for SO2 is around $3000 per capita.
Implications of the EKC
These results might lead one to believe that, given likely future
levels of income per capita, the global environmental impact
concerned would decline in the medium term future.
The turning point is near world mean income. In fact, because of

the highly skewed distribution for per capita incomes, with many
more countries below the mean (especially large countries), this
may not be what such a relationship implies.
Using the coecients estimated by Panayotou, Stern et al (1996),

provide global projections for forest cover and SO2 emissions.
Despite the EKC relationship found by Panayotou:
Global SO2 emissions rise from 383 million tonnes in 1990 to

to 1181 million tonnes in 2025; emissions of SO2 per capita
rise from 73kg to 142kg from 1990 to 2025
Forest cover declines from 40.4 million km

2 in 1990 to 37.6
million km
2 in 2025.
Implications of the EKC
Even if the data appear to conrm that the EKC ts the experience
of individual countries, it does not follow that further growth is
good for the global environment.
Arrow et al. (1995) note that:
The general proposition that economic growth is good for the

environment has been justied by the claim that there exists an
empirical relation between per capita income and some measures of
environmental quality.
They then note that the EKC relationship has been shown to apply
to a selected set of pollutants only , but that some economists
have conjectured that the curve applies to environmental quality
generally .
Arrow et al conclude that Economic growth is not a panacea for

environmental quality; indeed it is not even the main issue and that
policies that promote gross national product growth are not
substitutes for environmental policy.
Outline


Discounting
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Discounting
Many of the issues with which we deal in this text involve choices
with consequences that extend over time.
Such choices are said to have an ìntertemporal' dimension. Where

we deal only with current consequences we are doing an
ìntratemporal' analysis.
We will think about time in terms of successive generations of

humans. We will assume that the size of the human population is
constant over time, and that we can consider each generation in
terms of a single representative individual from it.
Question: How would the current generation behave with respect

to future generations, i.e how to make choices with consequences
for future generations.
Discounting
Consider just two generations. Generation 0 is the present

generation and has utility U0 ; Generation 1 represents the one
which follows and has utility U1 .
Let W now denote intertemporal social welfare (or, alternatively,

intergenerational social welfare). It can then be written as
W = ϕ0 U0 + ϕ1 U1
So that W is a weighted average of the utilities for each generation.
It is usual to set ϕ0 = 1 and ϕ1 = 1/(1 + ρ), where ρ is the utility

discount rate so that
1
W = U0 + U1
1+ρ
Discounting
Time discounting, for ρ >0 as generally assumed, means that
future utility `counts for less' than the same quantity of present
utility in obtaining a measure of intertemporal welfare.
Thus if one unit of utility received by the next generation were

regarded as less valuable by a proportion of 0.1 (i.e. 10%) than one
unit of utility received this period, then 1/(1 + ρ) = 0.9.
If we summed not over two periods but over T + 1 periods then we
have
T Ut
W = ∑ (1 + ρ)t
t =0
When T →∞ then
Ut
∞
W = ∑ (1 + ρ)t
t =0
−ρ t
∫ ∞
W = Ut e
0
Why discount future utility?
Individuals as consumers are observed to exhibit positive time

preference in that they require an incentive, in the form of the
payment of interest, to postpone consumption, and hence utility, by
saving.
So in thinking about how society should make intertemporal

choices, we should work with positive time preference in the form of
ρ > 0.
Many people argue that in comparing utilities over successive

generations, the only ethically defensible position is that utilities
attaching to each generation should be treated equally, implying a
zero rate of utility discounting, ρ = 0.
Discounting is controversial. There are disagreements about how

the utility discount rate should be determined, and whether it
should be zero or some positive number.
The arithmetic of discounting
Utility discounting might be described as discriminating against

future generations, by giving their utility levels less weight in the
maximisation exercise. It is this feature of discounting which leads
many to regard any positive discount rate as ethically indefensible.
Ut th
The present value is , that is what the t generation's
(1 + ρ)t
utility counts for in a simple summation across generations. It is
what future utility is treated as being worth in welfare terms now.
Table 3.2 provides some numbers that indicate what is involved.

Suppose that a generation spans 35 years, so that looking a century

ahead is equivalent to thinking in terms of the next three
generations.
The current worth given to utility of 100 one century ahead varies
from 75.13 for an annual discount rate of 0.27% to 12.5 for 2.0%.
The choice of a value to use as the discount rate is very important

when thinking about intertemporal distribution.
Outline


Discounting
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What is Sustainable Development?
The concept of 'sustainable development' have attracted much

political, popular and academic attention
'Sustainable development' now gures as a goal in dozens of

national environmental policy statements and in the opening
paragraphs of Agenda 21, the massive shopping list of world actions
adopted at the Earth Summit in Rio (1992).
Agenda 21 states: In order to meet the challenges of environment

and development, States decided to establish a new global
partnership. This partnership commits all States to engage in a
continuous and constructive dialogue, inspired by the need to
achieve a more ecient and equitable world economy, keeping in
view the increasing interdependence of the community of nations,
and that sustainable development should become a priority item
on the agenda of the international community.
What is Sustainable Development?
But what does sustainable development mean? The term

'sustainable' is not open to much dispute: it means 'enduring' and
'lasting' and 'to keep in being'. So, sustainable development is
development that lasts.
The 'Brundtland Commission' (1987) states that:

Sustainable development is development that meets the needs of
the present without compromising the ability of future
generations to meet their own needs. It contains within it two key
concepts:
the concept of 'needs', in particular the essential needs of the

world's poor, to which overriding priority should be given, and
the idea of limitations imposed by the state of technology and

social organization on the environment's ability to meet
present and future needs .
Concepts of sustainability
A concern for sustainability derives from an ethical concern for

future generations together with an appreciation of the facts, which
implies that such concern needs to be incorporated into current
decision making
A `concern for future generations' can take a variety of expressions,

and does not translate into a single simple constraint on current
planning.
Table 4.2 lists six concepts that are used and discussed in the
sustainability literature.
Concepts 1, 2 and 3 are basically economic in nature, and will be

discussed below.
Concepts 4 and 5 originate with ecologists will not be covered.
While the third concept is expressed in economic terminology, it

reects a position, on substitution possibilities, that is more
commonly found among ecologists than among economists.
None of these concepts explicitly species the duration of time over

which sustainability is to operate. Presumably one must have in
mind very long horizons for the idea of sustainability to have
substance.
But this begs the question of what is meant by a long period of

time: innite time horizon, millenia?
Economic concepts of sustainability
1. A sustainable state is one in which utility/consumption is
non-declining through time.
2. A sustainable state is one in which resources are managed so as

to maintain production opportunities for the future.
An example of a denition relating to the second of the above

concepts is that sustainability involves
Preserving opportunities for future generations as a common sense
minimal notion of intergenerational justice.
The idea is that the present generation does not have the right to
deplete the opportunities aorded by the resource base since it does
not properly òwn' it.
While the utility/consumption-based and opportunities-based

concepts start from dierent places, the Hartwick rule establishes
that constant consumption and equal opportunities are closely
linked.
Is sustainability possible?
Sustainability in the economic sense focuses on our ability to

maintain a given level of consumption of production of goods and
service indenitely over time
All economies rely on the extraction of non-renewable resources

such as fossil fuels
These stocks are nite and therefore are bound to run out some day
It seems improbable that any economy could achieve even constant

level of productive capacity or consumption indenetly
This point is of most immediate relevance to oil-rich countries in

Africa, and Middle-East? What would be a sustainable way of using
oil wealth?
Is sustainability feasible? Substitution possibilities
The starkest setting for the sustainability problem is one where an
economy has a xed quantity of some non-renewable resource, the
recycling of which is impossible.
Robert Solow has criticised those environmentalists who urge that

we should conserve resources for future generations.
This is a damagingly narrow way to pose the question. We have
no obligation to our successors to bequeath a share of this or that
resource. Our obligation refers to generalized productive capacity
or, even wider, to certain standards of consumption/living
possibilities over time.
What our successors will be interested in, according to Solow, is

not the amount of òil' in the ground that they inherit from us, but
rather whether they inherit the capability to do the things that we
now do using òil'.
They will be interested in the consumption opportunities that they

inherit, not the stocks of resources that they inherit.
Solow's argument is based on the belief that we can bequeath to

our successors something that is a substitute for non-renewable
resources.
If we cannot bequeath a substitute, then, to honour our ethical

commitment to leave them with the same consumption
opportunities as ourselves, we do have an obligation `to bequeath a
share of this or that resource'.
A simple optimal growth model, where production uses a

non-renewable resource, is introduced to explore these issues
Let W be welfare function
−ρ t
∫ ∞
max W = u (Ct )e dt (1)
Ct 0
s.t. K̇t = Q (Kt , Rt ) − Ct (2)
Ṡt = −Rt (3)

∫ ∞
S̄ = Rt dt (4)
0
Question: under what conditions is constant consumption for ever

possible, when production uses inputs of a non-renewable resource
available only in nite total amount?
We consider 3 cases depending on the type of substitutability of

inputs K and R .
Is sustainability feasible? Substitution possibilitiesCase 1:
Qt = α Kt + β Rt
The resource is non-essential in production. For Rt = 0, Qt = α Kt ,

and any level of output can be produced if there is enough capital.
The use of a non-renewable resource in production does not, in this

case, mean that sustainability as constant consumption is infeasible.
The intertemporal problem posed by the use of a non-renewable

resource in production is trivial: constant consumption for ever
requires no special attention to the rate at which the resource is
used.
This is because capital is a perfect substitute for the non-renewable

resource.
Qt = min(α Kt , β Rt )
Q is equal to whichever is the smaller of α Kt and β Rt . E.g. given
a small resource input Rt , Qt = β Rt is the maximum feasible
output, however much capital input is used.
Resource is essential in production, and substitution possibilities are

non-existent: no resource input ⇒ no output.
The intertemporal distribution problem is now a `cake-eating'

problem, i.e. a problem of sharing out use of the resource over time.
S̄ sets an upper limit to the total amount that can be produced

over all time.
In this model there are no substitution possibilities: when the

resource runs out, production, and hence consumption, goes to
zero.
Qt = min(α Kt , β Rt )
The problem with the obviously `fair' solution of equal shares is
that S̄ is nite, so that the innite planning horizon would mean
that the equal shares are of size zero a nite cake cannot be
divided into an innite number of pieces.
If there is a resource that is always an essential input to production,

and if there are no substitution possibilities for that resource
Then the intertemporal problem reduces to making the resource

last as long as possible by consuming, at each point in time, as
little as is possible consistent with survival.
There is no pattern of resource use over time that can make

constant consumption for ever feasible.
Is sustainability feasible? Substitution possibilitiesTaking
Stock
Taking Stock
Solow quoted above does not apply to either of these situations

in the former case conservation is unnecessary, in the latter case
future generations would be interested in how much of the resource
stock we left for them to use.
In fact Solow, like most economists, is assuming implicitly that
substitution possibilities are somewhere between those 2 cases, so
that the intertemporal distribution problem is non-trivial but
soluble.
Qt = Ktα Rtβ with α + β = 1
It can be shown that if α >β then constant consumption for ever
is feasible.
Clearly, if Rt is set at 0, then Qt is 0 the resource is essential in

production.
However, given enough K , and α > β, very high levels of output

can be produced with very small levels of resource input
and there exists a programme of capital accumulation such that Rt

never actually becomes 0 (it goes asymptotically to zero) and
consumption can be maintained constant for ever: Hartwick rule
The Hartwick rule will not result in constant consumption for ever
for case 1 and 2. Nor will it if α < β.
The Hartwick rule is that at every point in time the total rent
arising in the resource extraction industry must be saved and
invested in reproducible (human-made) capital.
Total rent is simply (Price − Marginal cost) × Qty extracted
Following the Hartwick rule means that the total value of the
economy's stock of reproducible capital together with its stock of
the non-renewable resource is held constant over time
The value of the remaining stock of the resource declines, while the
value of the stock of reproducible capital increases in compensating
amount.
The constant consumption level that goes with following the
Hartwick rule can be thought of as being like the interest on this
constant stock of total wealth.
The Hartwick rule is necessary but not sucient: constant

consumption will be achieved only if
intertemporal eciency conditions are satised, and
sustainability as constant consumption is feasible, i.e. if the

substitution possibilities as between capital and resources are
great enough.
Most economists, like Solow, assume substitution possibilities are

such that sustainability as constant consumption for ever (or at
least for a very long time) is feasible, so that the Hartwick rule is of
great practical policy relevance.
Policy relevance of Hartwick's rule?
Q1: Can you think of real life situations of application of Hartwick's

rule?
Q2: Can you think of real life situations of the implication of

policies ignoring the Hartwick's rule?
Policy relevance of Hartwick's rule?
Q1: Norway, and recently Gulfe countries such as Qatar, Kuwait

etc.
Hartwick's rule justies their strategy of channelling oil prots into

a national investment trusts which use the funds to buy up large
portfolio of stocks in other industries and other countries to provide
a ow of income to the country once oil reserves become exhausted
Q2: Most oil-rich African countries, Nigeria, Congo Rep etc. and
Gulfe countries before the 1990s did not follow this model and
ended up with resource curse when commodity prices went down.
Instead of being invested productively most of resource rent was
either consumed immediately or invested in white elephants
Weak and strong sustainability
A common theme in all the arguments about the existence of

economic sustainability is the possibility of substituting other forms
of productive assets for declining stocks of environmental resources.
Sustainability literature distinguishes between `weak sustainability'

and `strong sustainability'.
Proponents of both weak and strong sustainability take constant

consumption (or utility) to be what sustainability is.
They dier over the substitution possibilities.
`weak sustainabilists' judge that the state of the world is

eectively captured by case 3 with α >β (some degree of
substitutability) or even case 1 (perfect substitutability)
`strong sustainabilists' see case 2 (no substitutability) as being

more relevant.
Production potential at any point in time depends on the stock of
productive assets available for use. This stock can be classied into
human labour and all other productive resources (capital assets)
comprised of:
Natural capital: any naturally provided stock, such as aquifers and

water systems, fertile land, crude oil and gas, forests, sheries and
other stocks of biomass, genetic material, and the earth's
atmosphere itself.
Physical capital: plant, equipment, buildings and other

infrastructure, accumulated by devoting part of current production
to capital investment.
Human capital: stocks of learned skills, embodied in particular

individuals, which enhances the productive potential of those
people.
Intellectual capital: disembodied skills and knowledge. They do not

reside in particular individuals (culture, innovation, etc.).
The economy's production function in summary representative form

as
Q = Q (L, KN , KH ) (5)
where L is labour, KN natural capital and KH human-made capital

(physical capital + human capital + intellectual capital).
Proponents of strong sustainability argue that sustainability

requires that the level of KN be non-declining: mostly ecologists
who view little subsitution between KN and KH
Proponents of weak sustainability argue that it is the sum KN + KH

that must be non-declining: mostly economists among other Solow
and Hartwick
However, historical experience does tend to support the idea that

physical, human and intellectual capital accumulation can oset
any problems arising as stocks of natural resources are depleted.
It is in regard to the life-support and amenity services that natural

capital provides that there appears to less ground for optimism
about the extent to which human-made capital can be substituted
for natural capital.
Despite technological progress, it has yet to be demonstrated, that

human-made capital could replace natural capital in providing
life-support services for several billions of humans.
There is no answer to the general question: how far is KH

substitutable for KN ? To some extent, the answer is as much a
matter of taste and/or ethics as it is a matter of science and
technology.

Introduction To Issues in Environmental Economics: Mare Sarr

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Scope and Nature of Environmental Economics

Economic Development and the Environment

Introduction to Issues in Environmental Economics

Mare Sarr Introduction to Issues in Environmental Economics

1 Scope and Nature of Environmental Economics

2 Economic Development and the Environment

Mare Sarr Introduction to Issues in Environmental Economics

1 Scope and Nature of Environmental Economics

2 Economic Development and the Environment

Mare Sarr Introduction to Issues in Environmental Economics

1 Scope and Nature of Environmental Economics

2 Economic Development and the Environment

Mare Sarr Introduction to Issues in Environmental Economics

Wetlands are drained to secure agricultural land, or are converted

Inland and coastal waters are polluted by industrial and municipal

Land is contaminated by toxic chemicals;

Fisheries are shed beyond the levels of their sustainable yield;

The global atmosphere is treated as a sink for greenhouse gas

But why do people behave in this way?

Observations of the acts that give rise to environmental degradation

Such analyses are essential if policy is to be devised to reverse the

But analysis of why those agents behave as they do is an analysis

Policy measures that fail to reect underlying causes are unlikely to

Policy measure may be to make the forest a protected area and

Policy is unlikely to work because the local communities are now

They still have an incentive to enter the forest, albeit illegally, as

Policy addressed proximate causes, but not underlying causes.

Market failure and information

Government or intervention failure

Participatory and empowerment failures

We know that, given `ideal' conditions about institutions and

Actual market economies depart from the ideal conditions in various

In many environmental issues are characterized by `market failures',

These market failures are often responsible for environmental

An external eect, or an externality occurs

when the production or consumption decisions of one agent

Although standard economic theory assumes away externalities,

In practice consumption and production behaviour by some agents

Externalities are a source of market failure.

If there is a benecial externality the market will produce too

while in the case of a harmful externality the market will

We are only concerned here with externalities in regard to

Detailed treatment of externalities will be undertaken later in the

We saw earlier that absence of public goods is a condition for

However, some of the services that the natural environment

Public goods dier from private goods in that they are

non-rival: many individuals can consume the same good at the

non-excludable: it is impossible or very costly to exclude

For example rain forests provide many environmental services such

Conservation rainforest is costly while the benet accrues to all.

Since public goods are non-excludable, every economic agent will

Such behaviour results in less conservation that eciently required

Imperfect information about the future consequences of current

Many of the consequences of decisions about environmental

Once developed, a natural wilderness area can hardly be returned to

Government intervention oers the possibility of realising eciency

regulation of pollution emissions to have polluters internalize

provide information to agents so they can overcome imperfect

ensure public provision of public goods

However all government intervention in trying to correct market

Lipsey and Lancaster (1957) produced the general theory of the

In other words, the removal of one cause of market failure

Second, government intervention may itself induce economic

Fisheries are shed beyond the levels of their sustainable yield;

Policy measures that fail to reect underlying causes are unlikely to

An external eect, or an externality occurs

If there is a benecial externality the market will produce too

Public goods dier from private goods in that they are

Conservation rainforest is costly while the benet accrues to all.

Such behaviour results in less conservation that eciently required

Government intervention oers the possibility of realising eciency

For example to incentivize farmers to use more ecient irrigation

3 At early stage of industrialization, the scale eect will take

Shak and Bandyopadhyay (1992) estimated the coecients of

Using the coecients estimated by Panayotou, Stern et al (1996),

The general proposition that economic growth is good for the

Arrow et al conclude that Economic growth is not a panacea for

'Sustainable development' now gures as a goal in dozens of

Agenda 21 states: In order to meet the challenges of environment

None of these concepts explicitly species the duration of time over

An example of a denition relating to the second of the above