WERABE UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF AGRICULTURAL ECONOMICS

NATURAL RESOURCE AND ENVIRONMENTAL ECONOMICS

ASSIGNMENT TWO (2)

SUBMITTED TO TESHALE W.(PhD)

BY
ASCHALEW TAMIRAT (AGE/R/003/2015)

DEC15, 2023
WERABE, ETHIOPA
1. First

First you are expected to describe/discuss the nature of the environmental problem and
identify both direct and indirect causes of the environmental/ natural resource problem. Also
identify the firm/company, which has been responsible for the problem

Mendifa wetland are found in silti zone with in silti-District. The local community basically
households from the District use the Mendifa wetland for different purpose such as for
agricultural purpose, home use, cloth washing and animal drink.

But, today the wetland is under high pressure due to high population growth and scarcity of
farm land and lack of proper management.

The major human factors leading to the degradation of the wetland include conversion to
agriculture expansion, human settlement, overgrazing, deforestation, eucalyptus plantation,
sand and stone extraction and overexploitation of wetland resources.

These problems are emanated from the mismanagement situation. Wetland conversion often
results in water depletion, the displacement of populations, the destruction of traditional
production systems, habitat degradation, salinisation, increases of waterborne diseases and
other adverse ecological impacts . occurrence of flood and erosion, lack of water access,
decreasing of crop yield, and loss of biodiversity and climate change are the major impacts of
wetland degradation.

The major determinants the Mendifa wetland degradation wetlands in the area are being
encroached over time by the local community and other investment activities and also
degrade are farming activity along wetland, settlement expansion, overgrazing and
deforestation. farming activity along wetland were the major triggers of Mendifa wetland
degradation. The results reveal that arable farming is one of the main practices by the
indigenous communities living along these areas and which contributes to wetland
degradation.

identify the firm/company, which has been responsible for the problem

mendifa cultivation is rampant along the wetland due to inadequate knowledge on how to
perform sustainable agriculture within the area; this therefore leads to wetland degradation
and Improper farming methods and poor tillage systems, which contribute towards the

1
erosion of steep cultivated land and human settlement are amongst the most serious of
problems in the area ; Farming along the wetland not only disturbs wetland shore ecology

but also exacerbates siltation, inappropriate agricultural activities in the catchment and
cultivation of buffering zones have adversely affected wetland ecosystems. It is clear that
catchment degradation and cultivation of wetland buffering zones enhance the rate of soil
erosion and aggravate the discharge of pesticides, herbicides, agricultural runoff and
sediments into the wetland and thereby affects its ecological integrity and reduces the various
services of wetlands. This problem also takes place in the wetlands of the study area for
further agricultural expansion imposed by rapid population rate. Runoff from surrounding
agricultural areas are moved and piled in to wetlands due to clearing of trees and vegetations
by the local communities. As trees are cleared, the wetlands are prone to agricultural
activities and diverted through digging some ditches to take the water from wetlands to other
areas for further cultivation.

2. Second

Descibe the goal of the firm

Mendifa wetlands play important role in ecological, economic, social and cultural functions.
Wetlands (mainly rivers and their associated flood plains) have been the heart of human
civilization.Thus, Mendifa wetland systems have played key role throughout the development
and survival of humanities. In general, Wetland resources contribute billions of birr to people
of Ethiopia every year in the form of clean water, pure air, soil formation and protection, and
provision of food, fish, fiber, recreation, tourism, etc.

• Describe the unintended effects(extenalities

The number of population in the area was increased

the agricultural area remains the same so that the community is forced to convert and
clear wetlands to other land use forms/modifications in an unsustainable way.

over- utilizing the resources and brought the scarcity of land, deforestation, over use
of lake‘s water and soil erosion from the catchment.

the socio-economic benefits and ecosystem services of the wetlands and considered
as waste lands.

2
3. Third

What Is Neoclassical Economics?

Neoclassical economics is a broad theory that focuses on supply and demand as the driving
forces behind the production, pricing, and consumption of goods and services. It emerged in
around 1900 to compete with the earlier theories of classical economics.

KEY TAKEAWAYS

Classical economists assume that the most important factor in a product's price is its cost of
production.

Neoclassical economists argue that the consumer's perception of a product's value is the
driving factor in its price.

The difference between actual production costs and retail price is the economic surplus.

Neoclassical economic theory can impact how businesses operate gov and financial
institutions operate, as well as how governments regulate markets.

Critics argue the theory doesn't account for other factors that impact consumer decisions,
such as limited information, resource inequality, or emotional thinking.

One of the key early assumptions of neoclassical economics is that utility to consumers, not
the cost of production, is the most important factor in determining the value of a product or
service. This approach was developed in the late 19th century based on books by William
Stanley Jevons, Carl Menger, and Léon Walras.

Neoclassical economics theories underlie modern-day economics, along with the tenets of
Keynesian economics. Although the neoclassical approach is the most widely taught theory
of economics, it has its detractors.

Understanding Neoclassical Economics

Neoclassical economists believe that a consumer's first concern is to maximize personal

satisfaction, also known as utility. Therefore, they make purchasing decisions based on their

3
evaluations of the utility of a product or service. This theory coincides with rational behavior
theory, which states that people act rationally when making economic decisions. In other
words, people make a logical choice between two options based on their perception of which
one is better for them.

Further, neoclassical economics stipulates that a product or service often has value above and
beyond its production costs. While classical economic theory assumes that a product's value
derives from the cost of materials plus the cost of labor, neoclassical economists say that
consumer perceptions of the value of a product affect its price and demand.

Describe how the Neoclassical Economics thoughts have contributed for the
environmental/nature resource problem in question.

It is on these premises that a specific branch of economics addressing environmental

problems, known as ―environmental economics‖, has developed. The key analytical concept
around which this field of investigation is structured is that of externalities. The concept of
externality is not specific to environmental issues: it is used to define situations where the
activities of one (or more than one) economic agent(s) have consequences on the economic
well-being of other agents, without any kind of exchange or transaction occurring between
them.

When these indirect consequences increase well-being, externalities are qualified as

―positive‖; otherwise, they are qualified as ―negative‖. Pollution is the classic example of a
negative externality, while public health policies produce positive externalities.

Since there is no reward (or gain) for those producing positive external effects or sanctions
for those causing negative external effects, externalities cause the market to fail to achieve an
efficient allocation of resources. In fact, when externalities are present, private and social
costs diverge, so that profit maximizing decisions are socially inefficient because prices do
not carry all the relevant information.

If the factory can dispose freely of its waste in the environment, without paying for it, the
cost of pollution is not taken into account when deciding the optimum level of production. As
a result, the volume of production maximizing the producer‘s private profit is higher than that
guaranteeing the social optimum. The solution proposed for this market failure is that of
internalizing externalities by integrating them into the economic calculus of maximizing
actors. Different instruments have been proposed in order to achieve this goal: giving a price

4
to free environmental resources, taxing the polluter, introducing regulation, attributing
property rights over environmental resources. These instruments are applied in order to
correct price signals, so that individual optimizing decisions are aligned with the socially
optimum resources allocation. This frame of analysis is the major contribution of economic
theory to the field of environmental policies. In the solutions neoclassical economics provides
for the internalization of environmental externalities the key issue is determining the social
optimum. In order to determine the social optimum, it is necessary to set some optimum level
of pollution, since a level of zero pollution is considered unrealistic. This optimum level of
pollution is set according to a comparison between the costs and benefits of pollution and de-
pollution. The problem is represented as a problem of allocation of scarce resources. To
summarize, pollution causes damage but de-pollution implies costs. Resources are scarce, so
those resources to be invested in the protection or restoration of the environment cannot be
used for the production of other socially valuable goods. The internalization of environmental
negative externalities results in solving a problem of costbenefit analysis applied to pollution
and de-pollution. This approach oversimplifies the nature of environmental problems and
raises a great many critiques. First of all, the redistributive effects of environmental policies
designed according to this model are not taken into account. The unequal allotting of costs
and benefits among different individuals, social categories, present and future generations,
geographical areas is not considered in the decision process. Important issues of equity linked
to the environment go completely unaddressed in this frame.

The only social goal taken into account in the neoclassical approach is that of efficiency in
allocating scarce resources.

The valuation of environmental costs and benefits has become one of the main topics of
research in environmental economics. Economists define the social value of a good according
to the intensity of consumers‘ preference as expressed by people willingness to pay.

The claim here is that given the existence of competing objectives in environmental policies,
resolution requires some common measure of comparison. For example, when managing a
forest, conflicts can arise between objectives of biodiversity preservation, of wood
production, of recognition of cultural values attached to the forest. In the neoclassical
approach the way to solve the conflict is through comparing costs and benefits of different
forest management measures. This implies putting a price not only on biodiversity but also on
people‘s attachment to forests as part of their identity. This implies not considering that in

5
real life not all objectives are tradeable and that social relations exist (including relations to
the environment) that are constituted by refusing to put a price on them

4. Fourth,

Discuss how resource characteristics and resource scarcity influence the market allocation of
natural resources

What is resource scarcity?

Resource scarcity is essentially about current demand for a resource exceeding available
supply. But what matters is that this scarcity has potentially huge implications for how we
lead our lives and the economic prosperity of communities, countries and regions.

Resource scarcity occurs when demand for a natural resource is greater than the available
supply – leading to a decline in the stock of available resources. This can lead to
unsustainable growth and a rise in inequality as prices rise making the resource less
affordable for those who are least well-off.

Students introducing themselves to economics will become familiar with the different types
of factor inputs available to produce (supply) goods and services. These are summarised in
this graphic.

At the heart of many economic issues is this point: The economic problem involves decisions
about how to make the best use of limited (scarce) resources when not all wants/needs can be
fully satisfied.

resource scarcity Before proceeding it is important to briefly discuss the complexity of the
independent variable, resource scarcity. It can refer to at least three very different
situations—and many variations of these. The first, the minimalist account, concerns the
availability of natural resources needed to DIAGRAM A DIAGRAM B DIAGRAM C
Richard A. Matthew 7 satisfy basic human needs for food, shelter, and energy. In his widely
cited 2004 study, Jared Diamond discusses the case of Easter Island as a quintessential
example of the unsustainable use of natural resources leading to scarcity at the level of basic
human needs leading to social violence and disintegration. The island‘s forest cover—its
principal source of food, shelter and energy—was completely decimated as trees were cut
down at unsustainable rates, apparently to be used as rollers to move vast statues. A second
version of scarcity, the moderate account, concerns the availability of resources to satisfy

6
consumption at current or higher levels, which is to say consumption based on real and
projected demand, rather than a minimalist account of human needs. Mathis Wackernagel (et
al. 2002) is associated with the concepts of ―ecological footprint‖ and ―ecological overshoot.‖
Wackernagel‘s research compares actual human use of resources to the planet‘s bio-
productivity and shows that around 1980 humankind begins to overshoot the planet‘s
regenerative capacity. The trend has continued since that time. A third version of resource
scarcity, the maximalist account, also considered by Wackernagel, defines scarcity in terms
of the actual demand of both human and non-human species. Wackernagel‘s team calculates
the resource demand of non-human species as equaling 12 percent of the planet‘s bio-
productivity, which means that human overshoot of the world‘s resource base occurred in the
early 1970s. In principle, there is no reason to limit discussion to one account of scarcity, but
it is important to point out that how scarcity is understood and measured is likely to affect
analyses and policy recommendations. In public debate there is always a risk that arguments
will be met with counterarguments that are rooted in different assumptions, leading to much
confusion. In any case, however one defines resource scarcity there is a compelling body of
evidence that argues that having a satisfactory supply of natural resources is a growing
problem for much of humankind. For example, UNEP‘s third Global Environmental Outlook
report (2002) contends that both Europe and North America have seen gains in environmental
health due to successful pollution abatement programs, but, like much of the rest of the
world, they have made little progress on sustainable resource management. Their ecological
footprints are several times the world average, which is to say to maintain their current rates
of consumption they must import or extract foreign resources at unsustainable rates. This is
part of why the environmental trends everywhere else in the world are, according to UNEP,
negative. The Global Environmental Outlook report concludes by identifying four growing
divisions in the world: • The Environmental divide • The Policy divide • The Vulnerability
divide • The Lifestyle divide The most straightforward interpretation of this is that the
wealthy and militarily powerful industrial states of the north have strong pollution abatement
programs that are improving their air and water quality. They are faring less well as resource
managers, but they are able to overshoot their indigenous resource endowments through
technological innovation and trade, which maintains their sumptuous lifestyles but
contributes to the vulnerability of the peoples of the south. To this one might add that the
negative social effects of unsustainable extraction rates are being held in check through
displacement onto the weak and projection onto the unborn. If one accepts that (a) many
people around the world have inadequate local access to the natural resources—such as forest

7
products, fresh water, food, and energy—needed to maintain their current lifestyles or meet
their basic needs, but (b) the social effects of generalized scarcity are being masked through
displacement onto the poor and projection into the future, then it makes sense to consider
what an unmasking might reveal. My thoughts in this regard are organized around three
subjects: globalization, climate change, and ecological services.

Resource scarcity

occurs when demand for a natural resource is greater than the available supply – leading to a
decline in the stock of available resources. This can lead to unsustainable growth and a rise in
inequality as prices rise making the resource less affordable for those who are least well-off

Market failure is the economic situation defined by an inefficient distribution of goods and
services in the free market. Furthermore, the individual incentives for rational behavior do
not lead to rational outcomes for the group. Put another way, each individual makes the
correct decision for him/herself, but those prove to be the wrong decisions for the group. In
traditional microeconomics, this is shown as a steady state disequilibrium in which the
quantity supplied does not equal the quantity demanded. sustainable forest management is not
widely implemented, particularly in tropical forests. This occurs because markets fail to
support sustainable forest management practices. Furthermore, market failures are often
compounded by policy and institutional failures that make it even more unattractive to
manage forests sustainably.

5. Fifth,

explain the situation of the resource you identified in terms of sink and source limits

This is called ―sequestration.‖ When forests are cut down, much of that stored carbon is
released into the atmosphere again as carbon dioxide (CO2). This is how deforestation and
forest degradation contribute to global warming.

Invaluable forest services. Forests not only provide wood, fruit, bushmeat and medicines.
They also provide other less visible benefits which contribute to the general well being of
human beings: these are environmental services.

Forest is an exhaustible renewable resource because it takes less time to grow plants and
replenish in nature.

8
The situation is even less satisfactory regarding forest degradation due in particular to often
subjective, interpretations of the term and the gradation it implies. to determine the relative
importance of direct deforestation factors at regional and global levels: horizontal expansion
of the various forms of agriculture and animal husbandry taken together remains by far the
most important direct factor, but the share of shifting cultivation as well as that of ranching
and . Forest area changes

The neoclassical view of the environment is strictly anthropogenic. Valuing the environment
is done on the bases of the utility gained. The broader ecological role of natural resources is
not considered in its economic value. It is the view of neoclassical economic theories that
conventional national accounting calculations such as gross domestic product (GDP), reveal
the wealth of a nation. These national economic accounts record monetary flows and
transactions within the economy but also signal human well being or development. The
contribution of nature to the production process is ignored in these calculations. Therefore
sustainability is in essence seen by neoclassical economists as a problem of managing the
national portfolio of capital, maintain it at a fixed level.

Neoclassical theory states that environmental degradation will translate itself into a loss of
efficiency. The argument is that both "rapid" extraction rates and "externalities" will
inevitably bring about a departure from optimum allocation of resources (the so-called Pareto
efficiency)The neoclassical view of the environment is strictly anthropogenic. Valuing the
environment is done on the bases of the utility gained. The broader ecological role of natural
resources is not considered in its economic value..Neoclassical economics is a broad theory
that focuses on supply and demand as the driving forces of economic activity. Environmental
economics is based on the neoclassical model but places a greater emphasis on negative
externalities, such as pollution and ecosystem loss.The disciplines of environmental and
resource economics have been developed over decades as a substantial specialisation of
economic theory and application. Environmental economics evaluates environmental goods
while resource economics analyses scarce resource allocation.

9
Natural resource and environmental economics :-Forest Resources are depleted when it is
being used faster than it can replenish itself. The industrial revolution is when it all began. As
our culture advanced and our species invented many things that will make our lives easier,
our demand for raw materials increased by leaps and bounds. We get these resources from the
other. The problem is, we‘re using too much and without care. Our planet just can‘t keep up
with our ever increasing demands.

Forests are an important carbon sink, since both trees and soils are able to store large amounts
of carbon for a long time. However, carbon management is not just about deciding which
trees to cut, but also where harvesting and planting occurs on the landscape.

Virtually all of the materials and all of the energy that enters the economic system is disposed
of as waste. When the disposal of wastes exceeds the capacity of the biosphere to absorb
them the consequences can be bad for humans and other species. The ‗sinks‘ overflow and
the ‗services‘ that nature provides diminish. The conversion of land for agriculture and
settlements can exacerbate these problems especially when habitat is destroyed. At the global
level the concept of planetary boundaries has been introduced to help humanity avoid
crossing thresholds that would cause irreversible damage to the environment. The data shows
that as economies grow, many of these problems increase. Examples are provided covering
climate change, CFCs and lead, nuclear wastes, forests, oceans and fresh water.

6. Sixth,

discuss whether the market failure with respect to the resource in charge has contributed for
the environmental problem or not

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 behaviour
do not lead to rational outcomes for the group.

Causes of Market Failure

There are many types of imbalances that can affect the equilibrium of the markets. The
following list provides an overview of some common causes of market failure.

• Externalities: Externalities occur when the consumption of a good or service benefits

or harms a third party. Pollution resulting from the production of certain goods is an example

10
of a negative externality that can hurt individuals and communities. The collateral damage
caused by negative externalities may lead to market failure.

• Information failure: When there is insufficient information available to certain

participants in the market, this can also be the source of market failure. If the buyer or seller
in a transaction lacks access to the information on which the price is based, they may be
willing to overpay or undercharge for a good or service, disrupting the market's equilibrium.

• Market control: When one party has too much control over a market, this can also
create imbalanced pricing and lead to market failure. In the case of a monopoly or oligopoly,
a single seller or a small group of sellers can manipulate pricing. In other situations, known as
monopsony or oligopsony, it is the buyers that have the advantage. In either case, the
disrupted balance of supply and demand could cause market failure.

• Public goods: Public goods are another example of market failure because they defy
the tenets of supply and demand that drive the free markets. Public goods and services are
nonexcludable—once something like a street light is produced, it is accessible to everyone,
and the producer cannot limit consumption only to paying customers. Public goods are also
nonrival, as use by one individual does not limit consumption by others. Given these
characteristics, the private sector has little incentive to produce public goods, which leads to
market failure, and the government usually has to provide these goods or subsidize their
production.

Solutions to Market Failure

There are many potential solutions for market failure. These can take the form of private
market solutions, government-imposed solutions, or voluntary collective action solutions.

• Private market solutions: In some instances, the solution to a market failure may
emerge within the private market itself. For example, asymmetrical information could be
solved by intermediaries or rating agencies such as Moody's and Standard & Poor's informing
market participants about securities risk. Underwriters Laboratories LLC performs the same
task for electronics. Negative externalities such as pollution may be solved with tort lawsuits
that increase opportunity costs for the polluter. Radio broadcasts elegantly solved the non-
excludable problem by packaging periodic paid advertisements with the free broadcast.

11
• Government-imposed solutions: When the solution does not come from the market
itself, governments can enact legislation and take other measures as a response to a market
failure. For example, if businesses hire too few low-skilled workers after a minimum wage
increase, the government can create exceptions for less-skilled workers. Governments can
also impose taxes and subsidies as possible solutions. Subsidies can help encourage behavior
that can result in positive externalities. Meanwhile, taxation can help cut down negative
behavior. For example, placing a tax on tobacco can increase the cost of consumption,
therefore making it more expensive for people to smoke.

• Collective action solutions: While the government may have the upper hand in
developing legislative, tax, or regulatory solutions, private collective action can also help
solve the market failure. Parties can privately agree to limit consumption and enforce rules
among themselves to overcome the market failure of the tragedy of the commons.3
Consumers and producers can band together to form co-ops to provide services that otherwise
might be underprovided in a pure market, such as a utility co-op for electric service to rural
homes or a co-operatively held refrigerated storage facility for a group of dairy farmers to
chill their milk at an efficient scale.

Climate change as a market failure

A market failure causes an inefficient distribution of products and services in a free market. It
affects the intended outcomes expected by the market and environmental players.

Market failure is a situation in which transactions involving some products in a free market
are inefficient. Here, the benefits and costs of the transaction are not limited to the supplier
and consumer but spill over to third parties. This spillover leads to an inefficient distribution
of resources.

An example is the gas pollution emitted from industrial processes. The individual consumer
or producers don‘t feel the cost of this pollution but society does. Thus, we say market failure
occurs when free-market processes affect societal welfare.

Climate change is the significant changes in weather patterns over a period. A major cause of
climate change is the emission of greenhouse gases from various market processes involving
the burning of fossil fuels.

12
Economists believe that climate change is the greatest market failure because it‘s the product
of multiple market failures that organisations have been unable to account for. The biggest
one is the social and environmental cost of releasing greenhouse gases, like carbon dioxide
and chlorofluorocarbons that travels to the earth's atmosphere, absorb, and trap heat.

7. Seventh, Environmental Policy

we use the term environmental policy interchangeably with pollution control policy.
Formally, the policy we refer to only controls pollution. More generally, environmental
policy would also include policy to conserve or exploit natural resources. The insights we
highlight are general enough to encompass other environmental policy instruments involving
the exploitation of natural resources such as timber or fish.

Pollution control policies such as taxes, quotas, tradable permits, standards, and command
and control regulation are categorized into two types. The first type is called import price
neutral – it affects the cost of domestic production but leaves the price of imports unchanged.
These policies typically target a particular input, or stage of the production process. For
example, emission taxes, cap-and-trade programs, emission intensity requirements, or
renewable energy mandates impose costs on domestic production, but do not impose costs on
foreign producers in the rest of the world who export to the domestic market.

The second type of environmental policy is called import price augmenting – it impacts the
cost of domestic production and of imports. These policies typically target the product sold,
not the process of production. For example, a mandated maximum pesticide residue on
produce sold locally increases the costs for domestic and imported produce. Similarly,
maximum emission requirements or fuel economy standards on vehicles sold, impose costs
on both domestic and imported vehicles.

explain how market failure in terms of the natural resources under degradation can be
corrected by institutions/property rights

Property rights, and secure access to and control over land and natural resources can generate
critical incentives for conservation and sustainable use, management and governance of
natural resources. Insecure, unclear, limited or short-term property rights can inhibit
sustainable land and natural resource management and discourage stakeholders from acting
as long-term stewards of land and natural resources.

13
Market failure can be caused by a lack of information, market control, public goods, and
externalities. Market failures can be corrected through government intervention, such as new
laws or taxes, tariffs, subsidies, and trade restrictions.

14