Unit IV

[Natural resources]
Life on this planet depends upon a large number of things and services provided by the nature, which are known as natural
resources. Thus water, air, soil, minerals, coal, forests, crops and wild life are all examples of natural resources. Resources are
anything that has some value and utility to satisfy our requirements. Resources are of three types natural, man-made resources
and human resources. Natural resources are the resource that we get from nature like the sun, water, trees, petroleum etc. These
are all the original resources of the earth that are utilised by people and the range of natural services provided by these
resources that support life and economic activity. It is created in nature that are used and usable by humans. They include
natural substances (e.g., soil, water) and energy supplies (e.g., coal, gas) that serve to satisfy human needs and wants. Thus
natural resources include industrial raw materials and renewable resources such as timber and fisheries, but also other
environmental common property resources like clean freshwater that are used in or support economic activity. Natural
resources are naturally occurring materials that are useful to man or could be useful under conceivable
technological, economic or social circumstances or supplies drawn from the earth, supplies such as food, building
and clothing materials, fertilizers, metals, water and geothermal power. For a long time, natural resources were the domain
of the natural sciences. Natural assets occurring in nature is used for economic production or consumption.
4.1 Classification of natural resources
Based on the availability there are two types of natural resources renewable and non renewable.
4.2 Non renewable resources
The natural resources which cannot be regenerated along with their exploitation are known as non renewable
resources. These resources are limited in abundance due to their non-renewable nature and whose availability may
run out in the future are called non-renewable resources. These are exhaustible and very expensive by nature.
Examples include fossil fuels, minerals, etc.
Characteristics
(i) These are available only in finite quantities and hence termed as “stock resources”
(ii) These cannot be regenerated easily.
(iii) These are concentrated as minerals usually in lithosphere of earth in a number of forms.
(iv) These may be solids (coal, lignite, minerals), liquids (petroleum) or gases (natural gases)
(v) These substances remain as waste in some other forms after their use unless there are subjected to recycling.
4.2-1 Theory of optimal depletion
Hotelling’s theory is used by economists to predict the price of an exhaustible resource based on prevailing interest
rates. It assumes that events take place in an efficient market. Factors that will affect the supply of the exhaustible
resources, such as new discoveries and technology, are non-existent. Hotelling's theory states that owners of
nonrenewable resources will only produce basic commodities if doing so can yield more than could be earned from
available financial instruments, It is used by economists to attempt to predict the price of oil and other nonrenewable
resources, based on prevailing interest rates. Hotelling's rule was named after American statistician Harold
Hotelling.
Assumptions:
 Let a private owner owns a full stock of a natural resource.
 The complete stock of the resource is fully known and there is no more.
 Once some of the stock is withdrawn, the resource withdrawn is used completely with no waste and nothing
left over for reuse.
 The stock can never regenerate itself.
 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).
 There are no alternatives to the resource.
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The prices of nonrenewable resources have fluctuated more over the last few years. It has raised a lot of concern not
only among policymakers and economists but also business owners. Oil prices are a good case in point. Pricing
increased during 2000s but dropped sharply in 2008 due to the Great Recession. Once the economy recovered from
the financial crisis, prices increased again. So why the prices of such exhaustible resources fluctuate? American
mathematical statistician Harold Hotelling sought to answer the above questions in 1931, giving rise to what is now
known as Hotelling’s theory. His proposition starts with the trade-off that owners of nonrenewable resources face.
These individuals have two options. They can choose to leave the resources at their places of origin, where
commodity remains a physical asset. Or, they can extract the resources, sell them, and use the resulting proceeds to
invest in a financial asset. According to Hotelling, owners should always consider the current interest rates and
projected prices of their resources before making a decision. So how do you maximize your profits from a resource
that will eventually run out?
Let's suppose the interest rate on money in the bank is 5%. If one sell stock resources today for $1,000 and put the
money in the bank, one year from now he would have $1,050. He will have made $50 by selling it. So, if he leaves
the resources for a year, he needs the value of the resources to increase by 5% to make up for the lost interest he
would have earned if he had sold everything. Even though the amount of resources in it hasn't changed, and never
will, the value of the stock has to rise as fast as the interest rate to make it worth keeping the resources and not
selling everything. Otherwise he would just finish everything out as fast as possible and sell. But what happens if he
only take out some of the resources today and leave some for the future? That's Hotelling Rule in its simplest form.
For a non-renewable, exhaustible resource with completely known stock, no discoveries possible, no alternatives, no
recycling, private ownership and constant costs of extraction, the price of the resource will increase at the interest
rate over time.
The complete stock of the resource is unknown and there might
be more? If there is a non-zero chance that there is more of the
resource out there somewhere, the upward pressure on the price
caused by the Hotelling scarcity costs will result in increased
incentive to explore and try to find new deposits. Assuming
some of this exploration is successful, the increased supply will
drive prices down and extend the Hotelling price path.
Knowing that additional deposits are valuable can lead to
significant investments in exploration and the required
technologies to find more of the resource.
Increased marginal costs of extraction will cause the price to have to rise faster-to cover the increasing extraction
costs plus the scarcity costs. So increasing marginal costs will cause prices to rise faster than otherwise and will
increase incentives for additional exploration and the search for alternative resources.
While substitutes exist for most depletable resources, they are often more expensive per unit. Right now, solar
energy is significantly more expensive per kilowatt hour than is natural gas. But as the price of natural gas increases
due to scarcity. solar energy becomes relatively more affordable, even if the price of solar does not fall. So the
existence of an alternative resource (sometimes called a backstop resource) will lead to the potential for switching
between resources. If the price of the backstop resource decreases, the switch would happen sooner. This is one
reason policy makers will often subsidize the development of alternative resources in an attempt to move the
Hotelling switch between resources forward in time. As the price of the depletable resource rises and/or the price of
the alternative resource decreases, incentives are created to switch between the resources. Once the price of the
depletable resources rises far enough, the incentive to continue with extraction diminishes and investments in
alternative resources increase. This critical understanding of the rationing role of prices is often missing from
doomsday prediciions regarding world collapse due to running out of depletable resources. This is the primary

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argument against price interventions in resource markets. The marginal value of a nonrenewable resource stock
increases at the rate of interest.
4.2-2 Energy resouces: Energy is one of the most important inputs for economic development. From a physical
viewpoint, the use of energy drives economic productivity and industrial growth and is central to the operation of
any modern economy. Eg.coal, natural gas, petroleum, and water power, solar, biomass, wind, biogas, and tidal,
energy sources form of potential energy that can be used to perform work.
Non-renewable energy is energy derived from finite resources that are not replaced quickly enough to keep up with
the speed of consumption. For perspective, non-renewable energy sources will not be replenished in our lifetime, or,
more accurately, many human lifetimes. Most non-renewable energy sources are fossil fuels such
as petroleum and crude oil, coal, and natural gas, but nuclear fuel, mainly used to produce electricity, is also
generally classified as non renewable. The available supply of non renewable resources may be replenished through
recycling. Non-renewable energy is a source of energy that will eventually run out. Fossil fuels including coal, peat,
crude petroleum, and natural gas are non renewable sources of energy. Households, factories, companies, and
nations: they all depend on energy sources.
Coal comes from the remains of plants that died hundreds of millions of years ago. It has the highest level of carbon
of all fossil fuels.
Oil also known as petroleum that can be extracted and refined in order to make products such as gasoline, diesel,
and jet fuel.
Natural Gas was formed from the remains of tiny sea plants and animals that died millions of years ago. It is
mainly composed of methane.
Nuclear Energy is released when atoms' nuclei are fused together (fusion) or split apart (fission). Nuclear power
plants produce electricity through nuclear fission.
Renewable energy: Energy sources are categorized as renewable if they constantly and rapidly renew themselves
for steady, reliable use. Renewable resources may be defined as resources that have the potential to be replaced over
time by natural processes. The renewal process may be relatively quick, as with sunshine which comes on a daily
basis. The renewal process may be very slow, as in the formation of soil which may take hundreds of years. But non
renewable resources may be defined as resources whose stock or reserves is limited or fixed.
The most popular renewable energy sources currently are:
1.Solar energy Although it sounds like a perfect renewable energy source, the amount of solar energy we can use
varies according to the time of day and the season of the year as well as geographical location.
2.Wind energy To harness electricity from wind energy, turbines are used to drive generators which then feed
electricity into the National Grid.
3.Hydro energy As a renewable energy resource, hydro power is one of the most commercially developed. By
building a dam or barrier, a large reservoir can be used to create a controlled flow of water that will drive a turbine,
generating electricity. It is more reliable than solar or wind power. It is a commercial energy source.
4.Tidal energy uses twice-daily tidal currents to drive turbine generators. Although tidal flow unlike some other
hydro energy sources isn’t constant, it is highly predictable and can therefore compensate for the periods when the
tide current is low.
5.Geothermal energy By harnessing the natural heat below the earth’s surface, geothermal energy can be used to
heat homes directly or to generate electricity.
6.Biomass energy This is the conversion of solid fuel made from plant materials into electricity. Although
fundamentally, biomass involves burning organic materials to produce electricity, and nowadays this is a much
cleaner, more energy-efficient process. By converting agricultural, industrial and domestic waste into solid, liquid
and gas fuel, biomass generates power at a much lower economic and environmental cost.
4.2-3 Minerals: Minerals are the substances deposited with in earth crust from which an element of importance can
be extracted using suitable technique. These are non-renewable assets and once, mined out of the deposit, get
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depleted and lost forever. Along with population explosion, industrialisation and technological growth have led to
an increase demand in per head consumption of minerals. According to geologists, the known reserves of minerals
may not last long and most of them will be exhausted within 100 to 200 years. So now the scientists are in search of
new sources of minerals in the sea bed which may reduce the futuristic fears of exhaustion of resources.
Impact of mineral activities on environment:
(i) To develop mining’s, there is cutting trees causing deforestation which subsequently induces soil erosion.
(ii) Minining activities release a lot of particulates into environment which become sites for accumulations of toxic
substances and cause severe damage to living system.
(iii) The release of various effluents after the operations like concentration, beneficiation and refining can cause
pollution of water bodies.
(iv) The poisonous gases released during mining causes air pollution.
Some important efforts to conserve minerals resources are as follows:
(i) Selection and adoption of suitable methodology of mining which will have negligible effect on environment.
(ii) Economic and optimum use of minerals.
(iii) Recovering all associated elements as co-products or by products.
(iv) Use and reuse of scraps after suitable treatments.
(v) Replacing rare and costly minerals with those which are abundant and cheaper.
4.3 Renewable resources: The resources which can be renewed along with their exploitation and can be always
available for use are known as renewable sources. These resources are available in infinite quantity with an
unlimited supply and can be used repeatedly are called renewable resources. These resources are called
inexhaustible resources, with an unlimited supply. It is sustainable and cost effective in nature Example: forest,
wind, water, etc.

Characteristics
(i) These resources are capable of regeneration.
(ii) These are renewed along with exploitation and hence, always available for use.
(iii) The regeneration of these sources involves some ecological processes on a time scale.
(iv) The renewable sources become non renewable if used at a greater rate than the environment’s capacity to
replenish them.
(v) These resources comprise materials like food, timber, raw materials for clothing’s, leather etc. These also include
oxygen, fresh water solar energy and biomass.
Renewable Non-renewable
Depletion Renewable resources cannot be depleted over time Non-renewable resources deplete over
time
Sources Renewable resources include sunlight, water, wind Non-renewable energy includes fossil
and also geothermal sources such as hot springs fuels such as coal and petroleum
and fumaroles
Environmental Most renewable resources have low carbon Non-renewable energy has a
Impact emissions and low carbon footprint comparatively higher carbon footprint
and carbon emissions.
Cost The upfront cost of renewable energy is high. – For Non-renewable energy has a
instance, Generating electricity using technologies comparatively lower upfront cost.
running on renewable energy is costlier than
generating it with fossil fuels
Infrastructure Infrastructure for harvesting renewable energy is Cost-effective and accessible
prohibitively expensive and not easily accessible in infrastructure is available for non-

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 most countries. renewable energy across most countries
Area Requires a large land/ offshore area, especially for Comparatively lower area requirements
requirement wind farms and solar farms

4.3-1 Biological dimension of fisheries

Fisheries biology is a scientific discipline which is focused on the study of fisheries. Fisheries are fish populations
which are used for commercial value, and they include saltwater fisheries, freshwater fisheries, and fish farms in
both salt and freshwater. The goal of Fisheries management is to produce sustainable biological, social, and
economic benefits from renewable aquatic resources. The development of fishery over the time scale categorized as
(Csirke et. al.)
 Predevelopment Phase
 Growth Phase
 Full exploitation phase
 Overexploitation Phase
 Collapse Phase
 Recovery Phase
If fishery is in the Predevelopment Phase it has to promote. When in the growth or fully exploitation phase, fishery
should be maintained. If it is in the overexploitation phase, attempt should make to recover the fishery. Fisheries
biologists are very concerned about protecting productive and delicate ecosystems, and may engage in a variety of
techniques from promoting the cause of endangered fish to studying fish in the lab to protect the natural
environment. A fishery is a delicate system. Fisheries biologists study fish habitats and fish populations, learning
about the natural conditions which fish live in and then extending their knowledge to determine how a fishery can be
used sustainably. Fishing is the harvesting of already existing populations of fish and other aquatic animals but
Aquaculture is the purposeful cultivation and subsequent harvesting of both freshwater and marine aquatic plants
and animals.
4.3-2 Theory of optimal use of fisheries
The Optimal use of fisheries a useful tool for analysis of fisheries and harvest strategies. It provides a framework for
management decisions. Fishing operations should allow for the maintenance of the structure, productivity, function
and diversity of the ecosystem (including habitat and associated dependent and ecologically related species) on
which the fishery depends. The concept of steady state harvests and the biological growth function of renewable
resources. The resources that have the capacity for reproduction and growth are usually known as renewable
resources. This includes biological organisms such as fisheries and forests which have a natural capacity for growth,
and water and atmospheric systems which are reproduced by physical or chemical processes. It is well known that
renewable resources have their own life cycles, even if they are not exploited or consumed. In general, we expect
that the natural growth rate is greater than the natural mortality rate for renewable resources. However, the
maximum amount of resources cannot exceed the environmental carrying capacity. A steady state harvest is an
important concept. If for a period of time the stock being harvested (H) remains equal to the amount of net natural
growth of the resource (G) and these magnitudes remain constant over a sequence of consecutive periods, it is called
the steady-state harvesting. The constant magnitude being harvested is called the sustainable yield. S being the
actual rate of change of the renewable resource stock, and hence S = G - H . A steady state harvesting is denoted S =
0 & so the resource stock remains constant over time. The diagram depicts two different steady state harvests. The
maximum sustainable yield (MSY) for a given fish stock means the highest possible annual catch that can be
sustained over time, by keeping the stock at the level producing maximum growth. The maximum sustainable yield
(MSY) for a given fish stock means the highest possible annual catch that can be sustained over time, by keeping the
stock at the level producing maximum growth. The MSY refers to a hypothetical equilibrium state between the
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exploited population and the fishing activity. MSY is a theoretical concept used extensively in fisheries science and
management. In fisheries, MSY is defined as the maximum catch (in numbers or mass) that can be removed from a
population over an indefinite period.The MSY refers to a hypothetical equilibrium state between the exploited
population and the fishing activity. Growth overfishing is where the recruits to a fishery are caught before they reach
the size that would produce the maximum yield per recruit. At the other extreme, when a stock is excessively large
yield is restricted; the growth of the stock slows down due to competition for food, cannibalism or the limitations in
the carrying capacity of the environment. In between these two states lies a stock size at which the sustainable catch
is at the highest level – MSY. The inverted U-shaped curve is the logistic growth function for the resource, fish in
the example.
SMAXas shown in the figure. There is a precise stock
size (SMSY) at which the quantity of net natural growth
is at its maximum (GMSY). If at a stock of SMSY,
harvest is set at the constant rate HMSY , then the steady
state maximum sustainable yield (MSY) can be
obtained. However, HMSY is not the only possible
steady state harvest. There may exist other realistic
steady state harvest between 0 & HMSY that can be
supported by any stock between O & SMAX. For
example in fig , H1 is a realistic steady-state harvest if
the stock size is retained at either S1L or S1U. Optimal
management of renewable resources like fishery, forest
must involve strategies to ensure maximum sustainable
yield.
Steady State Harvests
4.3-3 Forest resources: Economic value of forest resources; biological dimension of forestry, and economic
dimension of forest resources
Forest resources: Economic value of forest resources
Forest is important renewable resources. Forest vary in composition and diversity and can contribute substantially to
the economic development of any country .Plants along with trees cover large areas, produce variety of products and
provide food for living organisms, and also important to save the environment. It is estimated that about 30% of
world area is covered by forest whereas 26% by pastures. Forests are main source of many commercial products
such as wood, timber, pulpwood etc. About 1.5 billion people depend upon fuel wood as an energy source. Timber
obtained from the forest can used to make plywood, board, doors and windows, furniture, and agriculture
implements and sports goods. For several major exporters, forest products are an important component of their
external trade. In the assessment of the tropical forest resources, a high correlation has been found between the
change in the forest area and the change in population density.
 Forest can provide food , fibre, edible oils and drugs.
 Forest lands are also used for agriculture and grazing and provide raw materials for a number of industries
 Forest is important source of development of dams, recreation and mining.
 Forest provide food, medicine and other products needed for tribal people and play a vital role in the life and
economy of tribes living in the forest.
 Forests are habitat to all wild animals, plants and support millions of species. They help in reducing global
warming caused by green house gases and produces oxygen upon photosynthesis.
 Forest can act as pollution purifier by absorbing toxic gases. Forest not only helps in soil conservation but
also helps to regulate the hydrological cycle (also known as water cycle, is a continuous movement of water
between hydrosphere, atmosphere, and lithosphere in a cyclic manner ).
 All over the world people appreciate the beauty and tranquillity of the forest because forests have a greatest
aesthetic value. Forest provides opportunity for recreation and ecosystem research.
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  Forests contribute substantially to the national economy. With increasing population increased demand of
fuel wood, expansion of area under urban development and industries has lead to over exploitation of forest
.At present international level we are losing forest at the rate of 1.7 crore hectares annually.
 Overexploitation also occurs due to overgrazing and conversion of forest to pastures for domestic use.
 Forest are burned or cut for clearing of land for agriculture ,harvesting for wood and timber , development
and expansion of cities .These economic gains are short term where as long term effects of deforestation are
irreversible
 Forests help to prevent the loss of topsoil through soil erosion in the ecosystems they’re found in.
 Forests maintain the ecosystem by absorbing greenhouse gases like carbon dioxide that are believed to be the
reason for climate change.
Deforestation rate is relatively low in temperate countries than in tropics. If present rate of deforestation continues
we may losses 90% tropical forest in coming six decades. Forest biodiversity refers to all forms of life found in
forests, including plants, animals, fungi, and microorganisms, and their roles in nature.
Biological dimension of forestry
Forest biological diversity is a broad term that refers to all life forms found within forested areas and the ecological
roles they perform. The forest biological diversity includes not just trees, but the multitude of plants, animals and
micro-organisms that inhabit forest areas and their associated genetic diversity. Forest biological diversity can be
considered at different levels, including the ecosystem, landscapes, species, populations and genetics. Complex
interactions can occur within and amongst these levels. In biologically diverse forests, this complexity allows
organisms to adapt to continually changing environmental conditions and to maintain ecosystem functions. Forest
biological diversity results from evolutionary processes over thousands and even millions of years which, in
themselves, are driven by ecological forces such as climate, fire, competition and disturbance. Furthermore, the
diversity of forest ecosystems (in both physical and biological features) results in high levels of adaptation, a feature
of forest ecosystems which is an integral component of their biological diversity. Within specific forest ecosystems,
the maintenance of ecological processes is dependent upon the maintenance of their biological diversity.”
Other forest functions and services, such as recreation, health and well-being, biological diversity, maintenance of
ecosystem services and the mitigation of climate change are increasingly recognized as integral components of
sustainable forest management and forest biological diversity as both a complex and unique element.
Forests are one of the most biologically rich terrestrial systems. Together, tropical, temperate and boreal forests
offer diverse sets of habitats for plants, animals and micro-organisms, and harbour the vast majority of the world’s
terrestrial species. Furthermore, forest biodiversity is interlinked to a web of other socio-economic factors, providing
an array of goods and services that range from timber and non-timber forest resources to mitigating climate change
and genetic resources. At the same time, forests provide livelihoods for people worldwide and play important
economic, social, and cultural roles in the lives of many indigenous communities. Therefore, forests and forest
biological diversity are innately linked to ecosystem and human well-being.
Unit V
[Economics of pollution control and environmental policy]

The major kinds of pollution, usually classified by environment, are air pollution, water pollution, and land
pollution. Modern society is also concerned about specific types of pollutants, such as noise pollution, thermal
pollution, light pollution, and plastic pollution. A pollutant is a substance that is present in concentrations that may
harm organisms (humans, plants and animals) or exceed an environmental quality standard. The term is frequently
used synonymously with contaminant. Emissions of pollutants into the air can result in changes to the climate.
Ozone in the atmosphere warms the climate. A pollutant is a material or energy that is introduced into the
environment that has unintended consequences or reduces the utility of a resource. The intensity of a pollutant's
negative impact on human health is determined by its nature and concentration.

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A Pollutant Taxonomy is the ability of the environment to absorb pollutants is called its absorptive capacity. Stock
pollutants are pollutants for which the environment has little or no absorptive capacity. Fund pollutants are pollutants
for which the environment has some absorptive capacity. Local pollutants cause damage near the source of
emissions while regional pollutants cause damage at greater distances
Pollutants can also be classified by their zone of influence, defined both horizontally and vertically. The horizontal
dimension deals with the domain over which damage from an emitted pollutant is experienced or Horizontal
dispersion is how far and wide pollution spreads at a given level of the atmosphere . It is primarily driven by wind
speed and direction, but can be influenced by topography as well. The vertical zone of influence describes whether
the damage is caused mainly by ground-level concentrations of an air pollutant or by concentrations in the upper
atmosphere. The vertical zone refers to whether the damage is ground-level or atmospheric. Surface pollutants cause
damage by accumulating near the Earth's surface. Global pollutants cause damage by concentrating on the
atmosphere.
5.1 Pollutant taxonomy: Pollution is defined as the existence of impurities or pollutant substances in sufficient
concentration levels, causing harmful effects on human beings, animals, plant life or material resources when
exposed for a sufficient duration of time, thus reducing the quality of life in the environment. Taxonomy is a science
that deals with naming, describing and classification of all living organisms including plants. Classification is based
on behavioural, genetic and biochemical variations. The ability of the environment to absorb pollutants is called its
absorptive capacity. Stock pollutants are pollutants for which the environment has little or no absorptive capacity.
Fund pollutants are pollutants for which the environment has some absorptive capacity.
Local pollutants cause damage near the source of emissions
Regional pollutants cause damage at greater distances.
a) Quantitative Pollutants- The substances which are already present in the environment, but are termed as
pollutants when their concentration (quantity) increases in the environment. eg. CO2 is present in the environment in
greater quantity than normal due to automobiles and industries and is hence termed as a quantitative pollutant.
b) Qualitative Pollutant- The substances which are not normally present in the environment and are added by
human beings and are pollutants by nature. Eg. insecticides, pesticides
On the basis of the form in which they persist
a) Primary Pollutants- The substances which are directly emitted from the source and remain in that form are
termed as primary pollutants eg, smoke, fumes, ash, dust, nitric oxide and sulphur dioxide
b) Secondary pollutants- The substances which are formed by chemical reaction between the primary pollutants
and constituents of the environment (i.e. those which are already present in the environment) .eg smog (when a large
number of gas-phase molecules and particulate matter are emitted to the atmosphere reducing visibility), ozone,
sulphur trioxide, nitrogen dioxide.
On the Basis of Disposal
a) Bio-Degradable Pollutants- the pollutants which are decomposed by natural processes or Pollutants that can be
broken down through the agency of micro-organisms are called biodegradable pollutants. eg domestic (municipal)
sewage and garbage.
b) Non Bio-degradable Pollutants- The pollutants which don’t decompose naturally or decompose slowly or a
non-biodegradable pollutant is the one that could not be broken down or decomposed by the decomposing fungi and
bacteria present in the water and soil eg. Aluminium cans and DDT i.e. used as an insecticide that is chemically
stable. It does not dissolve in water rather it mixes with the adipose tissue in the living organisms and persists in the
food chain, causing biomagnification. In the soil, it destroys the microbial fauna .
5.2 Efficient allocation of pollution
Suppose two neighbours in a remote mountain area, Mary and Jane, burn fires in their cabins that generate air
pollution that harms two other individuals, Sam and Richard, who live downwind. We shall assume that Mary and
Jane are the only polluters and that Sam and Richard are the only people harmed by the pollution. We shall ignore,
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for example, the effect of Mary and Jane's emissions on the possible problem of global warming. Mary and Jane
each benefit from polluting the environment by emitting smoke from their fires. In Panel (a), we see that Mary's
demand curve for emitting smoke is given by DM and that Jane's demand curve is given by DJ.
1To determine the total demand curve, DT, we determine the
amount that each person will emit at various prices. At a price
of $13 per day, for example, Mary will emit 20 pounds per day.
Jane will emit 14 pounds per day, for a total of 34 pounds per
day on demand curve DT. Notice that if the price were $0 per
unit, Mary would emit 40 pounds per day, Jane would emit 20,
and emissions would total 60 pounds per day on curve DT.

The marginal cost curve for pollution is determined in Panel (b)

by taking the marginal cost curves for each person affected by
the pollution. In this case, the only people affected are Sam and
Richard. Sam's marginal cost curve is MCS, and Richard's
marginal cost curve is MCR. Because Sam and Richard are each
affected by the same pollution, we add their marginal cost
curves vertically. For example, if the total quantity of the
emissions is 34 pounds per day, the marginal cost of the 34th
pound to Richard is $4, it is $9 to Sam, for a total marginal cost
of the 34th unit of $13.

In Panel (c), we put DT and MCT together to find the efficient

solution. The two curves intersect at a level of emissions of 34
pounds per day, which occurs at a price of $13 per pound. The
efficient quantity of emissions is found at the intersection of the
demand (DT) and marginal cost (MCT) curves in Panel (c) of
the figure "Determining the Efficient Level of Pollution", with
34 units of the pollutant emitted. The marginal benefit of the
34th unit of emissions, as measured by the demand curve DT,
equals its marginal cost, MCT, at that level. The quantity at
which the marginal benefit curve intersects the marginal cost
curve maximizes the net benefit of an activity.
5.3 Environmental policy instruments
Numerous instruments have been developed to influence the behaviour of actors who contribute to environmental
problems. These policy instruments – such as pollution charges, subsidies, tradeable permits, and some types of
information programs – have been described as “harnessing market forces”. Traditionally, public policy theories
have focused on regulation, financial incentives, and information as the tools of government. However, new policy
instruments such as performance requirements and tradable permits have been used.
Regulation: Environmental regulations attempt to protect public health and the environment from pollution by
industry and development. It aims at improving environmental quality but may come at the cost of jobs,
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productivity, or other undesirable economic effects. It helps to prevent or minimise risks of harm to human health or
the environment from pollution or waste. Environmental regulations raise production costs and lower
productivity by requiring firms to install pollution control equipment and change production processes. Regulatory
costs can influence firms' decisions about locating new plants and shifting production among existing plants.
Examples of utilizing market mechanisms for environmental regulations include green taxes (taxes on energy,
transport, pollution and resources), marketable emissions permits (for example, cap-and-trade systems i.e. it sets the
quantity of emissions allowed, environmentally and economically and limits emissions and putting a price on them.
Cap and trade is one way to do both), and the elimination of harmful government subsidies. Regulation is used to
impose minimum requirements for environmental quality. Such interventions aim to encourage or discourage
specific activities and their effects, involving particular emissions, particular inputs into the environment (such as
specific hazardous substances), ambient concentrations of chemicals, risks and damages, and exposure. In many
cases, local and regional governments are the issuing and controlling authorities. However, more-specialized or
potentially hazardous activities, such as industrial plants treating dangerous chemical substances or nuclear power
stations using radioactive fuel rods, are more likely to be controlled by a federal or national authority. Detailed
environmental regulations have resulted in a considerable improvement in the quality of air, water, and land since
the early 1970s. Regulations are also rigid: they are difficult to change. That can be considered as a strength, since
rigidity ensures that regulations will not change too suddenly. However, rigidity can also be considered a weakness,
because it slows down innovation, like creating new technologies, such as more-efficient emission scrubbers on
smokestacks that would remove more pollution than what the regulation mandates. When regulations demand
standards that are difficult or impossible to meet because of a lack of knowledge, skills, or finances on the part of
the actors or mismanagement by policymakers regulations will not be effective.
Financial incentives: Governments can decide to stimulate behavioral change by giving positive or negative
financial incentives. For example, through subsidies, tax discounts, or fines and levies. Such incentives can play an
important role in boosting innovation and in the diffusion and adoption of innovations. For example, in Germany the
widespread subsidizing of solar energy systems for private homeowners increased the large-scale adoption of
photovoltaic (PV) panels (a renewable energy technology which transforms the energy from the sun into electricity
using photovoltaics). Financial incentives or disincentives can also stimulate professional actors to change. A
potential drawback of financial incentives is that they distort the market. When not used for a limited period, they
can make receivers dependent upon the subsidy. But the drawback is that subsidies are expensive instruments,
especially when they are open-ended.
Environmental reporting and eco labeling: There are several instruments that aim to inform decision makers
about the environmental effects of their actions. Decisions are usually based on a cost-benefit analysis of which
environmental costs and benefits are not part. The environmental impact assessment (EIA) is an instrument that
helps public decision makers to decide on initiatives with a certain environmental impact, such as the construction of
roads and industrial plants. The EIA, which has become a legal requirement in many countries, requires that the
environmental effects of a project, such as the building of a dam or shopping mall, be studied and that the actors be
informed of how to mitigate environmental damage and what compensation they could receive for doing so. EIAs
allow decision makers to include environmental information in a cost-benefit analysis. Although all EIAs cannot
stop initiatives from taking place, they can reduce the negative environmental impacts.
Global policy agreements
From the early 1970s, the United Nations (UN) has provided the main forum for international negotiations and
agreements on environmental policies and objectives. In the 1970s, the United States government enacted three
major environmental laws: the Clean Air Act, the Clean Water Act, and the Toxic Substances Control Act. Elected
representatives passed this environmental legislation to increase regulations regarding air, water, and toxic
substances. The 1972 Stockholm conference was the first international conference on environmental issues and was
followed by the United Nations Conference on Environment and Development (UNCED) summits in Rio de Janeiro
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in 1992 and in Johannesburg in 2002. The UN also hosted special conferences on climate change, such as those of
1996 in Kyoto and 2009 in Copenhagen. The EU's initial nationally determined contribution (NDC) under the Paris
Agreement was the commitment to reduce greenhouse gas emissions by at least 40% by 2030 compared to 1990. To
achieve this, countries must reduce their greenhouse gas emissions to 'net zero' by around 2050.
5.3-1 Command and control (CAC ) (Emission standards)
Command-and-control regulation has a long history, and is said to be heavily featured in the USA. In 1970. The use
of Command and Control in regulation involves the government or similar body to “command” the reduction of
pollution (e.g. setting emissions levels) levels and to “control” the manner in which it is achieved (e.g. by installing
pollution-control technologies). It seek to limit pollution through explicit mandates or restrictions on polluting
activity. The firm should maintain the quality of the environment.
It has been argued that CAC has the potential to be effective under certain conditions Command-and-control
regulation sets specific limits for pollution emissions and specific pollution-control technologies that must be used It
involves three elements: (1) identification of a type of environmentally harmful activity, (2) imposition of specific
conditions or standards on that activity, and (3) prohibition of forms of the activity that fail to comply with the
imposed conditions or standards. Although such regulations have helped to protect the environment, they have some
shortcomings: they provide no incentive for going beyond the limits they set; they offer limited flexibility on where
and how to reduce pollution; and they often have politically-motivated loopholes. Command-and-control regulation
has been highly successful in protecting and cleaning up the environment.
Merits
 They are preferred in cases where the pollutant is so highly toxic that concern over their impact outweighs
any economic efficiency concerns
 Preferred when the Marginal Abatement Cost Curves or MAC (The abatement cost is the cost for the
industry/firms to reduce or prevent pollution following a new regulation. MAC measures the economic cost
of an additional unit. So in general, it measures the cost of reducing one more unit of pollution. The higher
the emission reduction, the greater the marginal abatement cost) are uniform across all of the firms in the
regulated industry and the government can easily know the MAC curve.
 Preferred when the initial reduction in the amount of pollutant significantly benefits society, while continued
reduction doesn't offer as much benefit (The Marginal Benefit of reduction is highly inelastic).
Demerits
 With technology constantly evolving it is very difficult for the regulatory agency to stay current with the
most effective methods.
 All of these standards (design, performance, input) are just one piece of the puzzle to try to reduce pollution.
This isn't to say that the government should integrate all of the standards into one uniform regulation. This
would drastically reduce flexibility of choice for the firms-see next point.
They limit the firm’s ability to find the most cost-effective way to continue production while reducing pollution.
This occurs because the each individual firm might have differing cost structures, so a one-size-fits-all standard
mandated from a centralized government agency doesn't afford the firms the flexibility to address their particular
externality problems. This leads to economic inefficiency. Often times it is hard or impossible for the government
to know the cost structures of each of the polluting firms. This knowledge is required if the regulation is to be
efficient. Even if traditional methods lead to an efficient solution, they might draw accusations of unfairness from
the polluting firms. In order to be efficient in most markets, the regulators must split the responsibility for reducing
pollution unequally among the polluting firms. The ones required to reduce pollution the most might cry foul over
being treated differently.Finally, without quick responses and strict consequences non-compliance they are unlikely
to succeed. There will be an incentive for firms to find loopholes if the regulatory agency or the regulation itself is
weak.

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5.3-2 Emission charges
A pollution charge is a fee based on the quantity of pollutants that are discharged into the environment. A user
charge is a fee paid in exchange for the use of natural resources or for the collection or disposal of pollutants. Most
environmental taxes are designed primarily to raise revenue, often to fund environmental protection activities. The
economic rationale behind such taxes is that those who cause pollution should bear the costs. Such costs include
both damages to the environment and the administrative costs incurred by the authorities that regulate polluters. To
be economically efficient, environmental taxes should reflect both of these costs.
 Pollution fee charge based on the quantity of pollutants released into the environment
 User fee i.e. fee for the use of resources
 Product charge i.e. charge on a product believed to have environmentally harmful effects
 Other fees on environmentally damaging activities various mechanisms
5.3-3 Transferable emission permits: It gives a firm a property right to emit a certain level of a pollutant, but no
more. The firm needs to obtain the right to exceed the limit by purchasing more permits. If the firm does not want to
use all of its permits, it can sell them to someone else. Government begins by setting the desired level of emissions
the government has control over the final amount of pollution. Firms are issued permits to emit pollutants. Only the
desired number of permits is issued. Thus, the quantity is assured. (e.g. if goal is 1000 tons of emissions, may give
100 firms permits for 10 tons each). Firms can buy and sell permits.
 Firms with higher MAC will be willing to buy permits from firms with lower MAC.
 If the price paid is less than the MAC of the high-cost firm, it is better off.
 Similarly, if the price is greater than the MAC of the low-cost firm, it is better off. It can take the money it
gets from selling the permit, use it to reduce pollution, and still have some left over.
Thus, permit trading allows a given level of pollution control to be achieved for the least possible cost. Economists
consider this least-cost solution to be efficient. There are two types of trading programs:
1.Credit trading programs i.e. firms can sell credits generated by reducing emissions more than required e.g. offset
programs are an example.
2.Cap-and-trade programs i.e. Government makes a centralized decision as to how much pollution is allowed, then
distributes permits to all participants.
5.3-4 Liability rules
Environmental liability is an instrument of environmental protection for the prevention of and compensation for
environmental harm. It promotes the personal responsibility of the (economic) players. It refers to the potential
environmental costs that a buyer incurs when purchasing or leasing an asset. Properly constituted environmental
liability law creates economic incentives to prevent the occurrence of harm, paving the way for the payment by the
polluter of compensation for any harm that occurs. The legislature can create environmental liability legislation
under both public and civil law. Liability for environmental harm is designed to compensate affected parties, with a
particular focus on restoring or replacing injured resources and/or providing compensation for lost value.Liability
provisions can also serve as gap-fillers, covering activities not specifically identified as illegal but nevertheless
resulting in harm to the environment, livelihoods, and public health. So environmental liability refers to the potential
environmental costs that a buyer incurs when purchasing or leasing an asset. These losses not only have profound
ecological effects, but also impair human well-being and deprive national economies of billions of dollars in
revenues, impeding sustainable development. Environmental law liability provisions – which are well-established
for U.S. and EU oil spills and hazardous waste contamination - offer one set of potential protections. In terms of
civil law this is a matter of compensation for harm to life, limb, health or property of individuals who fall victim to
such harm mediated by environmental media as a result of the conduct of other individuals. This kind of harm is
covered in particular by the Environmental Liability Act. International environmental liability law is becoming
increasingly important in the discussion on better international implementation and compliance with environmental
standards. An example of this is the discussion on national and European supply chain regulation. International
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environmental liability law can provide compensation for transboundary or extraterritorial damage incurred by the
polluter and thus contribute to damage-avoiding behavior. Liability for harm to the environment as a common good
- for instance to biodiversity, water and soil - can strengthen the hand of preventive environmental protection and
ensure the enforcement of compensation for environmental harm in accordance with the polluter-pays principle.
5.3-5 Other instruments: voluntary agreements, information disclosure
Voluntary approaches in environmental policy, including agreements on environmental performance negotiated with
industry and public programmes in which firms can volunteer to participate, are increasingly popular in a number of
countries. Voluntary agreements are agreements between a government authority and one or more private parties to
achieve environmental objectives or to improve environmental performance beyond compliance to regulated
obligations. The potential advantages of voluntary approaches include better relationships between government and
industry, enabling performance improvements (in areas such as the environment and human rights) to be achieved at
lower cost and more quickly than traditional 'command and control' regulation. It is more flexible, effective, and less
costly than the traditional approaches.
Types of voluntary approach
1. Unilateral initiatives where polluters act without direct government involvement to protect the environment.
2. Bilateral agreements between the regulator and a polluter or group of polluters. These initiatives involve
negotiation between the parties about how environmental protection will be achieved. Both parties have
obligations under the agreement with polluters generally expected to meet certain targets and abide by
conditions to protect the environment
3. Voluntary public (or government) programs where the regulator determines who is eligible to participate, the
obligations of participants, and the incentives used to encourage compliance.
Voluntary agreements (VA) are playing an increasingly important role in many countries as a means to achieve
environmental and social objectives. They tend to be popular with those directly affected and can be used when
other instruments face strong political opposition. It can take on many forms with varying levels of stringency.
While all VAs are ‘voluntary’ insofar as firms are not compelled to join, some may involve incentives (rewards or
penalties) for participation. Firms may agree to direct emissions reductions or to indirect reductions through changes
in product design. voluntary approaches provide firms flexibility in developing pollution control
technologies tailored to their production processes. By providing information to firms about their pollution
problems and ways to account for the full costs of pollution control, voluntary agreements have the potential to
promote innovative behavior. Voluntary agreements are also a subset of a larger set of ‘voluntary approaches’ in
which industry may first negotiate standards of behaviour with other firms or private groups and then allow third
parties to monitor compliance. This larger set also includes unilateral voluntary actions by industry. This is more
likely to occur in concentrated industries where coordination among firms is easier and when there is sufficient
heterogeneity among firms so that there is greater potential to learn
Unit VI
[Valuation and cost-benefit analysis of environmental resources]
6.1 Valuation of the environment

Environmental valuation refers to a variety of techniques to assign monetary values to environmental impacts,
especially non-market impacts. Environmental valuation methods have been used to determine the benefits and costs
related to the use of environmental goods, improving their conditions or remedying environmental damage and must
consider the complexity of the area. For example, the economic benefits of national parks extend beyond tourism;
natural amenities and recreation facilities often serve to attract and retain people, entrepreneurs, businesses, and
retirees. On the other hand, it is seen that how environmental conditions can affect the value of other goods.
Economists have traditionally developed tools to measure environmental values by estimating individuals’
willingness to pay to benefit from environmental goods. The costs associated with environmental deterioration are
measured by the loss suffered by the individuals who benefited from the damaged good, and deciding the
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appropriate compensation for losing the benefit. If the benefits of environmental protection can be measured, they
can be compared with costs. Decision makers can then implement environmental policies that maximize the net
benefits of such choices to society what economists refer to as maximizing social welfare. A policy that maximizes
social welfare is economically efficient, and most economists consider movements toward efficiency, measured
through benefit-cost analysis, a critical criterion in environmental policy design.

Total Economic Value (TEV) The economic benefit provided by an environmental good or service is the sum of
what all members of society would be willing to pay for it. For resources traded in markets such as oil, land, timber,
and crops, the value of small quantities of market goods can be measured by their observed price. In competitive
markets, prices reflect both the marginal cost of producing the good to suppliers and the marginal value to
consumers. Prices are readily observed and constantly updated.It refers to calculate economic value added,
determine the difference between the actual rate of return on assets and the cost of capital, and multiply this
difference by the net investment in the business. It combines all the different values, which are grouped according to
the service provided by the environmental good. The use values are those derived from the actual use of the
resource, while the non-use values are not related to its present use. The former includes the direct use value—the
value derived from the direct use and exploitation of the environmental good, the ecological value—defined by the
benefits that environmental goods provide to support forms of life and biodiversity and the option value—related to
future use opportunities of the good. Non-use values are composed of the existence value—the value that
individuals give to environmental goods for their mere existence—and the bequest value—the value estimated by
individuals when considering the use of goods in the future by their heirs.
TEV =use value +non-use value + option value.
However, the value of an environmental amenity remains what people are willing to sacrifice for that amenity.
The methods specifically related to environmental valuation can be classified as follows:
Contingent Valuation Method (CVM): is a widely used method for estimating economic values for all kinds of
ecosystem services and environmental goods which are not traded in the market and hence have no market price.
CVM is typically used to estimate the benefits (or costs) of a change in the level of provision (or in the level of
quality) of a public good. This information can then be used in a cost-benefit analysis, which assesses the impacts of
government project or policy. For instance, imagine an increase in public investment out of current taxes for
improving the quality of water in a river or sea by treating sewage. It is easy to count the costs: the amount of money
spent. However, what are the benefits? One can try to count them one by one in their respective units, for instance
better public health, less odour, availability of non-contaminated fish. On the other hand, he/she could ask a
representative sample of the concerned local population how much they would have been willing to pay (in the
forms of taxes for instance) in order to improve the water quality. Adding these results over the whole population, or
we would have a monetary representation of the benefits obtained. The CVM is applied through conducting a survey
in which people are directly asked how much they would be willing to pay (WTP) for a (change in) specific
environmental service. It is also possible to ask people the amount of compensation that they would be willing to
accept (WTA) to give up an environmental service. The first approach is called ‘contingent’ valuation, because
people are asked to state their willingness to pay, contingent on a particular scenario and the environmental service
described to the respondent. Some limitations are:
 When respondents are asked about their willingness to pay hypothetically, they tend to give higher values
than what they would actually pay in a real situation.
 Rather than expressing value for the good or service, the respondents might sometimes actually be
expressing their feelings about the scenario or the valuation exercise itself (they do not believe that a
described change is feasible or that it will really take place).
 Respondents may give different willingness-to-pay amounts, depending on the specific form of payment
chosen (e.g. if the form of payment is voluntary donation respondents may give higher values than if asked

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 to pay through higher taxes).
Choice experiment method. The objective of a choice experiment is to estimate economic values for
characteristics (or attributes) of an environmental good that is the subject of policy analysis, where the
environmental good or service comprises several characteristics. This method provides the respondents with
alternative choices in which different environmental goods are defined by their attributes. It is a survey approach
designed to elicit consumer preferences based on hypothetical markets. It present hypothetical scenarios in which
they must choose between different goods or services with varying attributes and prices. Respondents are required to
choose between multiple public or private goods. The stated preference valuation method, are proposed as a tool to
assign monetary values to environmental externalities during the ex ante stages of environmental impact assessment.
Ex: directly asking people, in a survey, how much they would be willing to pay for specific environmental services.
In some cases, people are asked for the amount of compensation they would be willing to accept to give up specific
environmental services.
Revealed preference methods (Household production approach). The revealed-preferences method involves
determining the value that consumers hold for an environmental good by observing their purchase of goods in the
market that directly (or indirectly) relate to environmental quality. It is a method of analyzing choices made by
individuals, mostly used for comparing the influence of policies on consumer behavior. Environmental values are
estimated by observing the values of market goods related to the non-market environmental good, such as the
purchase of a home or visits to a recreational site. This method is used to estimate the use value only. It involves
determining the value that consumers hold for an environmental good by observing their purchase of goods in the
market that directly (or indirectly) relate to environmental quality. The demand for environmental goods can be
measured by examining individuals’ expressed preference for these goods relative to their demand for other goods
and services. Moreover, it asks individuals explicitly how much they value an environmental good.
Travel cost method. Values are estimated by accounting for the cost incurred by people who travel to visit an
environmental good. The method assumes that the willingness to pay must be at least as large as the travel cost
incurred. The travel-cost method is explained in Figure 50.1.
Suppose there is a single lake in a city, where the entry fee is OP which
is fixed per visit. Initially, recreational demand for the lake is shown by
the demand curve BDo and the environmental quantity level is E0. If
there is an improvement in environmental quality of lake, then the
demand curve will shift outward as AD1 and environmental quality
level to E1.

With this effect, there is an increase in the number of visits to PK. The gain in consumers’ surplus is equal to the
area PAK. The net gain in consumers’ surplus after improvement in environmental quality of the lake is shown as:
РАК – PBC = ABCK.
The travel-cost approach looks at the pattern of recreational use of a lake and uses this information to derive a
demand curve to estimate the total amount of consumers’ surplus. To do this, visitors are divided into a number of
origin zones of increasing distance from the lake. Then a survey is used to determine the time and monetary cost
involved in reaching to the lake.
Hedonic price method. The hedonic pricing method is used to estimate economic values for ecosystem or
environmental services that directly affect market prices. It is most commonly applied to variations in housing prices
that reflect the value of local environmental attributes. It estimates the monetary value of the characteristics of a
good. It can be used to estimate economic benefits or costs associated with:
 environmental quality, including air pollution, water or noise pollution,
 environmental amenities, such as aesthetic views or proximity to recreational sites

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Advantages:
 The main strength of this method is that it can be used to estimate values based on actual choices.
 Property markets are relatively efficient in responding to information, so can be good indications of value.
 Property records are typically very reliable.
 Data on property sales and characteristics are readily available through many sources, and can be related to
other secondary data sources to obtain descriptive variables for the analysis.
 The method is versatile, and can be adapted to consider several possible interactions between market goods
and environmental quality.
This approach attempts to identify how much of a property differential is due to a particular environmental
difference between properties, and how much people are willing to pay for an improvement in the environmental
quality that they face and what the social value of improvement is. It identifies the internal and external factors and
characteristics that affect an item’s price in the market There is a positive relation between air quality and property
price as shown in Figure 50.2. The figure indicates that house price increases with air quality improvement. Figure
50.3. indicates that the implicit marginal purchase price of Za (air quality) varies according to the ambient level (Za)
prior to the marginal change.

The field of environmental valuation has recently expanded both from a theoretical and practical point of view.
There are two parts to performing hedonic regression analysis. The initial step is determining the relationship
between an asset’s value or price (which would be the dependent variable in the analysis) and the independent
explanatory variables (which are the characteristics, including the property’s features, the location features, and the
environmental features). The price variation, which occurs due to changes in any of the property or asset’s
characteristics, is called the hedonic price. The hedonic price of an asset can be called the asset’s additional cost,
based on the additional benefit derived from the property’s features. The second part of hedonic regression is the
analysis of the households’ willingness to pay, with consideration of their income and preferences. The willingness
to pay is derived from the size of the property, the income of a household, and preferences based on individual
characteristics, which include age, family size, race, and social background, etc.
Preventive Expenditure Method: It is a cost based valuation method that uses data on actual expenditures made to
alleviate all environmental problems. Often, costs may be incurred to mitigate the damage caused by an adverse
environmental impact. For example, if drinking water is polluted, extra purification may be needed. Then, such
additional defensive or preventive expenditure could be taken as a minimum estimate of the mitigation of benefits
beforehand. Under it, the value of the environment is inferred from what people are prepared to spend to prevent its
degradation. The averting or mitigating behavior method infers a monetary value for an environmental externality
by observing the costs people are prepared to incur in order to avoid any negative effects. For example, by moving
to an area with less air pollution at a greater distance from their place of work thus incurring additional
transportation costs in terms of time and money. Both of these methods are again, conceptually closely linked.
These methods assess the value of non-marketed commodities such as cleaner air and water, through the amount
individuals are willing to pay for market goods and services to mitigate an environmental externality, or to prevent a
utility loss from environmental degradation, or to change their behavior to acquire greater environmental quality.
16
Replacement Cost Method:This is a Cost-based technique that measures the potential expenditures that would be
required to replace or restore a productive asset that would be damaged by some project or development. These
costs are then compared to the costs of preventing the damage from occurring to determine which is more efficient.
If an environmental resource that has been impaired is likely to be replaced in future by another asset that provides
equivalent services, then the cost of replacement may be used as a proxy for the environmental damage, assuming
that the benefits from the original resources are at least as valuable as the replacement expenses. A shadow project
(a nonprofit) is usually designed specifically to offset the environmental damage caused by another project. For
example, if the original project was a dam that inundated some forest land, then the shadow project might involve
the replanting of an equivalent area of forest elsewhere. It values an environment good by the cost incurred in
restoring the environment to its original state of level after it has damaged.
In Figure 50.4, the benefits and costs per unit are measured on the
vertical axis while the level of restoration is at the horizontal axis. The
restoration level means to replace the lost environmental good. The
slope of curve В indicates that with the increase in restoration level,
benefits increase at a decreasing rate. The slope of curve С indicates
that the restoration costs are an increasing function of the level of
restoration. The economic efficiency is achieved at the restoration level
ORE where the difference between curve В and curve С is the
maximum. The net gain is NG at this level of restoration.

Welfare foundations: Economic, environmental, and social development must be protected simultaneously. The
welfare society must continue to develop. This means that development must be both economically sound and
socially harmonious, taking into account both human health and environmental issues. Economic growth must occur
without increasing environmental pressures, in accordance with the United Nations goal of reversing the present
trend of loss of natural resources by 2015. The welfare of the environment is the mandate and over the years the
environment has significantly changed. In order to ensure sustainability in the use of the natural resources the
solutions that conceive today must be long lasting, which must especially minimize waste and maximize the
conservation efforts.
Dimensions of value: Environment has three dimensions, viz. physical, biological and social.
The physical environment consists of abiotic or non-living components such as land, air and water. The
individuals live, learn, work and play. People interact with their physical environment through the air they breathe,
the water they drink, the homes in which they live and the transportation they use.
The biological environment: It is also known as the biotic dimension of the environment, this dimension of the
environment comprises of all living beings including micro-organisms, plants, animals and above all man. As such it
is also known as the biosphere.
Flora :- Plants occur in various forms such a woodland, forests, meadows grasslands etc. Various plants growing in
a particular area are generally known as vegetation.
Fauna :- Our earth is inhabited by millions of animals. Different areas are occupied by different types of animals
depending upon their environment and requirements of life. While plants are primary producers, animals are
primary and secondary consumers.

The social environment: It is also known as cultural or man-made environment; it is concerned with the social
behaviors of the organisms. All the organisms of the floral and the faunal environment organize themselves into
social groups and form what is known as social environment. It involves population interaction and behaviour
patterns of animals in response to their environment.

All organisms living in different parts of the world derive matter from the physical environment for their sustenance
and do economic activities. This gives rise to what is called economic environment. Economic activities develop
civilization and makes social organisation of human beings rather systematic. The economic significance of natural
resources depends upon the magnitude of two basic variables: current flows of income and potential future flows of
17
income. The first is largely a function of production costs and market demand, and the second of natural resource
endowments and management planning.

Environmental analysis: An environmental analysis is a strategic technique used to identify all internal and
external factors that could affect a company’s success. Internal components reveal the strengths and shortcomings of
a company, while external components represent the opportunities and risks. This exists outside of the company.

PESTLE Analysis [Political, Economic, Sociological, Technological, Legal and environmental]: Each of these
can have a profound effect on the business and varying implications, for example, in terms of duration of impact -
short term or long term. The PESTLE study considers several factors that have an impact on the business
environment. It is a macroeconomic instrument with that is used to understand the external environment through
more extensive environmental analysis.
P: Political factors include elements such as tax policies, changes in trade restrictions and tariffs, and the stability of
governments.

E: Economic factors include elements such as interest rates, inflation rates, gross domestic product, unemployment
rates, levels of disposable income, and the general growth or decline of the economy.

S: Social factors include trends in demographics such as population size, age, and ethnic mix, as well as cultural
trends such as attitudes toward obesity and consumer activism.

T: Technological factors include, for example, changes in the rate of new product development, increases in
automation, and advancements in service industry delivery.

E: Environmental factors include, for example, natural disasters and weather patterns.

L: Legal factors include laws involving issues such as employment, health and safety, discrimination, and antitrust.

First, the environment provides resources that an organization needs in order to create goods and services.
Second, the environment is a source of opportunities and threats for an organization. Executives must also realize
that virtually any environmental trend or event is likely to create opportunities for some organizations and threats for
others. Third, the environment shapes the various strategic decisions that executives make as they attempt to lead
their organizations to success. The environment often places important constraints on an organization’s goals, for
example. A firm that sets a goal of increasing annual sales by 50 % might struggle to achieve this goal during an
economic recession or if several new competitors enter its business. Environmental conditions also need to be taken
into account when examining whether to start doing business in a new country, whether to acquire another company,
and whether to launch an innovative product, to name just a few. It is a broad framework for managers to understand
the business environment. Wise executives carefully examine each of these six segments to identify major
opportunities and threats and then adjust their firms’ strategies accordingly.

SWOT Analysis [Strengths, Opportunities, Weaknesses, and Threats]: These four factors are utilized to
determine where a company stands regarding strategy. These four elements are divided into two groups. One can
observe them a bit to see how they assist us in conducting an environmental study. A SWOT analysis helps find the
best match between environmental trends (opportunities and threats) and internal capabilities. A SWOT analysis
typically identifies and addresses internal factors that can influence future decisions, while environmental scans
encompass external realities capable of the same. A strength is a resource or capacity the organisation can use
effectively to achieve its objectives.
 Internal Factors: Internal factors in this type of analysis are strengths and weaknesses. Because they can be
affected and even controlled by the organization, they are referred to as internal analysis if a corporation has
a firm brand name. This is a strength because it was made possible by the organization’s efficient use of
resources. As a result, this is an internally generated element that highlights one of the causes of the
company’s success.

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  External Factors: External considerations in this type of environmental assessment include threats and
opportunities. Unlike the elements listed above, the company cannot control them in any way. In fact, these
circumstances frequently occur on their own. Competition is a concern to all businesses since it is impossible
to eliminate it. As a result, external factors function in this manner.
Hence, under SWOT analysis internal factors that might affect the business (strengths and weaknesses) and
external factors (opportunities and threats) can be assessed.
Chapter VII
[International environmental issues]
International environmental externalities and public goods
A public good has two key characteristics: non excludable and non rivalrous. These characteristics make it difficult
for market producers to sell the good to individual consumers. Non excludable means that it is costly or impossible
for one user to exclude others from using a good. Non rivalrous means that when one person uses a good, it does not
prevent others from using it. When an individual or a group of individuals use a particular good, the supply left for
other people to use remains unchanged. Therefore, non-rivalrous goods can be consumed over and over again
without the fear of depletion of supply. But is not applicable for all types of goods. A non-rivalrous good that is also
non-excludable is the most ideal kind of public good. In short, it is the perfect public good.

Externalities arise whenever the actions of one economic agent directly affect another economic agent outside the
market mechanism.Public goods have positive externalities, like police protection or public health funding. Not all
goods and services with positive externalities, however, are public goods. Investments in education have huge
positive spillovers but can be provided by a private company. A negative externality arises when one person's
actions harm another. When polluting, factory owners may not consider the costs that pollution imposes on others.
Policy debates usually focus on free-rider and externalities problems, which are considered more serious problems
than non rivalrous consumption. A negative externality is also called an “external cost” i.e. cost accruing to party
not involved in economic transaction and a positive externality is called an “external benefit” i.e. benefit accruing to
party not involved in economic transaction. Many environmental problems can be characterized as externalities. The
over-exploitation of common pool resources such as fisheries is driven by an externality. An external cost is
generated when one fisherman catches fish, thereby reducing the availability of fish for others to catch and
increasing their costs of catching fish. Moreover, this external cost reduces the incentive for any fisherman to invest
in maintaining the fish stock for future use since others can harvest any investment.

Economics of climate change: The economics of climate change refers to the study of the economic costs and
benefits of climate change, along with the economic impact of actions aimed at limiting its effects. It is the global
phenomenon of climate transformation characterized by the changes in the usual climate of the planet (regarding
temperature, precipitation, and wind) that are especially caused by human activities. As a result of unbalancing the
weather of earth, the sustainability of the planet’s ecosystems is under threat, as well as the future of humankind and
the estability of the global economy. Global warming is the planet's response to higher levels of greenhouse gases in
the atmosphere. These gases create a kind of blanket that traps the heat from the sun and sends it back to the planet’s
surface. Humans have contributed to the current crisis by burning fossil fuels that emit greenhouse gases and add to
that heat-trapping "blanket."

International agreements: International agreements are formal understandings or commitments between two or
more countries. An agreement between two countries is called “bilateral,” while an agreement between several
countries is “multilateral.” The countries bound by an international agreement are generally referred to as “States
Parties.” International environmental agreements (IEAs) are treaties negotiated, signed, and ratified by individual
nation-states to address transboundary environmental issues.

The Kyoto Protocol is an international agreement on climate change, developed under the United Nations
Framework Convention on Climate Change (UNFCCC). The Protocol encourages 192 parties to reduce their
greenhouse gas emissions, with many developed nations having binding emissions reduction targets. Major
meetings have included the disappointing COP15 in Copenhagen in 2009, as well as COP18 in Doha, Qatar in 2012,
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where the Kyoto Protocol was extended to 2020 with a second commitment period (the Doha amendment).However,
the Kyoto Protocol ends in 2020 and was replaced by the Paris Agreement.

The Paris Agreement was agreed in 2015 by 175 parties. The aim of the agreement is to keep global warming to
‘well below’ 2 °C, and strive to limit warming to 1.5 °C. Each party nominated an emissions reduction target.
Australia proposed a target of 26–28% below 2005 levels by 2030. In comparison, the European Union pledged a
target of 40% below 1990 levels by 2030. The United States (US) nominated a target of 26–28% below 2005 levels
by 2025.The Climate Change Authority recommended a 30% reduction from 2000 emissions levels by 2025. To
limit global warming to 1.5°C, greenhouse gas emissions must peak before 2025 at the latest and decline 43% by
2030. It was also stated that carbon emission must be reduced by 45 percent from 2010 levels by 2030 and further to
net-zero by 2050. That means immediate alternatives must be made in critical sectors such as energy, agriculture,
construction, and all other sectors that are responsible for global temperature rise. The Paris Agreement is a
landmark in the multilateral climate change process because, for the first time, a binding agreement brings all
nations together to combat climate change and adapt to its effects. Since 2020, countries have been submitting their
national climate action plans, known as nationally determined contributions (NDCs). Each successive NDC is
meant to reflect an increasingly higher degree of ambition compared to the previous version. It aims to strengthen
countries' ability to deal with the impacts of climate change and support them in their efforts. To reach these
ambitious goals, appropriate mobilization and provision of financial resources, a new technology framework and
enhanced capacity-building is to be put in place, thus supporting action by developing countries and the most
vulnerable countries, in line with their own national objectives. The Agreement also provides for an enhanced
transparency framework for action and support. The Paris Agreement places great emphasis on climate-related
capacity-building for developing countries and requests all developed countries to enhance support for capacity-
building actions in developing countries.

The Montreal Protocol on ozone-damaging gases does not directly address climate change, but ozone-damaging
gases contribute to global warming. The 1987 Montreal Protocol binds 196 nations to reduce the emission of ozone-
damaging gases, commonly used in fridges, foam and industrial applications. These gases thin the ozone layer,
allowing more ultraviolet (UV) light to pass through the atmosphere. Increased exposure to UV light is linked to an
increase in skin cancer. Australia was one of the first nations to ratify the Montreal Protocol, and has met or
exceeded all of its targets to date. In 2016, scientists reported the first signs of healing in the ozone hole over
Antarctica. The review made a number of recommendations, which the Government will implement and aims to
have in place by the start of January 2018.

Durban Climate Change Conference November 2011: The outcomes included a decision by Parties to adopt a
universal legal agreement on climate change as soon as possible, and no later than 2015

The United Nations Framework Convention on Climate Change (UNFCCC), agreed in 1992, is the main
international treaty on fighting climate change. Its objective is to prevent dangerous man-made interference with the
global climate system.

International trade and the environment: Trade can have both positive and negative effects on the environment.
Economic growth resulting from trade expansion can have an obvious direct impact on the environment by
increasing pollution or degrading natural resources. Liberalisation may lead to specialisation in pollution-intensive
activities in some countries if environmental policy stringency differs across countries – the so-called pollution
haven hypothesis (i.e.firms will seek to avoid the cost of stringent environmental regulations of high energy prices
by locating production in countries where environmental norms are laxer). Economic growth resulting from trade
expansion can have an obvious direct impact on the environment by increasing pollution or degrading natural
resources. The open markets can improve access to new technologies that make local production processes more
efficient by diminishing the use of inputs such as energy, water, and other environmentally harmful substances. As a
country becomes more integrated within the world economy, its export sector becomes more exposed to
environmental requirements imposed by the leading importers. The expanded trade increases the scale of production
for the world as a whole, meaning that the total volume of pollution and environmental damage is likely to increase.

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Trade also necessarily involves energy use for transportation, with resulting air pollution and other environmental
impacts. How much free trade would affect the environment revolved around four main hypotheses:

1.Scale Effects: As free trade expands total economic activity, there is greater pressure on the environment, both
through increased inputs from natural resources such as energy, timber or freshwater sources needed to drive an
expansion in production, and through greater volumes of air and water pollution emissions—more hazardous wastes
or more toxic releases arising from increased production. Moreover, as trade liberalization prompts the re-allocation
of productive resources through specialization, as well as scale economies, the concentration of economic activities
places even more pressure on the environment.

2. Competition Effects: As free trade increases the international competition, pressure increases at the company
level to minimize environmental expenditures in the same way that companies avoid other kinds of sunk costs (a
cost that has already been incurred and that cannot be recovered). This competitiveness concern is transmitted by the
private sector to governments, who move to relax the monitoring and enforcement of environmental regulations to
keep companies at home.
3. Locational Effects: If domestic governments maintain strict environmental regulations in the face of increased
market competition, companies responding to capital mobility opportunities will exit countries with high
environmental regulations (or enforcement), and move to countries either with no regulations, or with more lax
enforcement of those regulations. The shorthand for this effect is the “pollution haven hypothesis.”
4. Regulatory Effects: Finally, even if governments are not swayed by competitiveness concerns and maintain or
enhance domestic environmental regulations, those regulations may run afoul of trade laws. Prior to the adoption of
NAFTA and the WTO, many argued that hard-fought regulations covering environmental, human health, food
safety and wildlife protection would clash with trade rules, with the latter trumping the former.
Direct consequences of climate change on trade could come from more frequent extreme weather events and rising
sea levels. Supply, transport and distribution chains infrastructure are likely to become more vulnerable to
disruptions due to climate change More importantly, climate change is expected to decrease the productivity of all
production factors (i.e. labor, capital and land), which will ultimately result in output losses and a decrease in the
volume of global trade. Effective environmental policies and institutional frameworks are needed at the local,
regional, national, and international levels. The impact of trade liberalization on a country’s welfare depends on
whether appropriate environmental policies are in place within the country.

NOTE: FOR MORE DETAILS USE ANY OTHER TEXT BOOK OR MATERIAL ALONG
WITH CLASS TEACHINGS.

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