Environmental Studies

HS 302
Pritee Sharma
March 2018
 How Environment Emerged in
Economic Policy Making
• Functions of Environment

• Classical economists

• Neoclassical economists

• Keynesians

• 1970s onwards environment emerged as an

important concern questioning govt. policies,
markets and technology
 Environmental History:
Euro-Atlantic Development Model
• Why was Europe able to leap ahead of the rest of the
world?

• China until around 1750, i.e. Yangtze Delta, and

England were constrained by scarcity of land to grow
food, supply fuel and provide materials.

• Europe (England) gained access to biotic resources-

tobacco, sugar cotton and grains from its colonies.

• exploit ‘subterranean forest’

 The Development Dilemma

• development of internal combustion engine or electric motor

• Europe’s development path is special case and cannot be repeated

everywhere and anytime

• The world is under “tragic dilemma”

• Despite political and economic freedom decolonization in “imagination”

has not happened.
 China’s Case beyond 1990s
• China achieved remarkable economic growth along with decline in poverty from
33 percent in 1990 to 10 percent in 2006.

• Yet in absolute terms China is now world’s largest carbon dioxide emitter ahead
of USA and second largest importer of oil.

• Industrial affluence and global equity cannot be attained at the same time. So
countries can opt either for affluence with oligarchy or sufficiency with view of
equity.
 Unequal Appropriation of global
resources
• Goods are distributed through international trade: 25 % of world population
appropriates 75% of world’s resources.

• More than half of bauxite, Two-thirds of world nickel, and half of world’s fossil
fuels are consumed by triad of USA, Europe and Japan.

• This constellation is the root cause of geopolitical conflicts.

Changing Economic Geography of world- Supply
Side (Production)
• For past 20 years newly industrializing economies are occupying favorable
positions as energy suppliers (Saudi Arabia, Venezuela, Russia), exporters of
hardware and software (Thailand, China and India), exporters of agricultural
goods (Brazil and Argentina).

• But the rise of China or India remains far from encompassing the entire country.
Shanghai and Shenzen in China or Mumbai and Bangalore in India are rather
locations for cross-border capital formation.
 Rise of transnational consumer class

• China and India alone account for 20 percent of global consumer class even though with
considerably low average income. The consumer class represents 19 % of China’s
Population, 33% of Brazil’s population, 43% in Russia, and 89% of Western Europe. You can
figure out the growth potential in these countries.
• Three types of resource-intensive consumer goods : meat consumption, electrical
equipment and motor vehicles (exploiting energy, materials and land area).
 Environmentalism and Economic Liberalization

• 1972 Stockholm Conference on Human
Environment UNCHE
• 1980 World Conservation Strategy of IUCN
(International Union for the Conservation of
Nature)
• 1983 Brundtland Commission WCED (World
Commission on Environment and Development)
• 1945 Bretton Woods (United Nations Monetary and
Financial Conference (US- Reagan and UK Thatcher
governments) set up IBRD, GATT and IMF
• 1947 General Agreement on Trade and Tariffs
GATT…1990s (Dunkel’s draft to Parallel Regional
Trade Agreements- NAFTA, ASEAN, SAARC etc.)
• 1995 World Trade Organization (WTO)

• 1987 Publication of “Our Common Future” • Conflicts on role of the World Bank in developing
countries- growth and environmental degradation-
• 1992 Earth Summit at Rio-de-Janiero (2nd UN Brundtland Commission- Sustainable Development.
Conference on Env. And Development) UNCED

• 2002 Rio+10 at Johannesburg South Africa (3rd UN

conference on Env. And Development)

• 2012 Rio+20 at Rio-de-Janiero, Brazil

• 2015 COP21 Paris Summit

 Montreal Protocol
• Ban Ozone depleting substances
• 1. Vienna Convention-protection of ozone
layer, 1985
• 2. Montreal protocol-1987 complete ban in
Sweden, Norway, US, Canada
• 3. Kyoto protocol on carbon sinks and
emission trading -1997
• In India- Clean Air Act
 Ecological Debt
• Concepts of “ecological debt” and “ecological foot print”

• Eco-debt of a country: (i) environmental damage it causes to other countries, (ii)

ecological damage caused historically, (iii) Exploitation of ecosystems at the expense
of equitable rights of other countries.
(Centre for Sustainable Dev. Ghent University)

• Carbon Debt- (IPCC Paris 2006)- build of gases due to consumption of fossil fuels-
causing melting of glaciers, desertification, agricultural yield losses, loss of plant and
animal species.

• Global carbon Debt at this rate for 1990 alone is 980 billion Euros.
 Limits to growth and dematerialization

• “Limits to growth” Meadows et al (1972) and concept by Thomas malthus

• Materials Balance Approach:

– Environment is a closed system: hence we apply first and second laws of thermodynamics:

• Industrial ecology, industrial metabolism and dematerialization research

• Kuznet’s curve

– Inverted U shaped relationship between per capita income and environmental

attributes.

– Evidence for Environmental Kuznet’s Curve (EKC) exists mainly with respect to
emission of pollutants (Sulphur, SPM, and CO2) but not for “resource stocks” like soil
and forests or global resilience.

– Relationship between growth in income and environmental parameters is complex.

 Sustainable Consumption and Production

• becoming responsible “ecological • This ecological modernization is from

citizens.” supply side.

• Ecolabels guide consumers • “Industrial Ecology” research especially on

• responsibility for environment to
population and citizens
‘lifecycle analysis’ is linked to ecological
modernization. Product lifecycles affect
both efficiency and sufficiency as product
purchasing, use and disposal should be
sustainable.
 The Population Problem
• Thomas Malthus: Population growth poses trap to nations seeking development.

• World population is growing at 1.4% per year. It is as high as 7.9% in Rwanda and 8.6% in Liberia, whereas it is
less than 1% in Italy and Portugal, and declining populations in Hungary, Bulgaria and Latvia (1995-2000).

• Birthrates are crude measure of population trend, more important is (i) Number of persons in child-bearing
years and (ii) Number of children those persons are bearing.

• Stationery Population: is one in which age and gender specific fertility rates yield a birth rate that is constant
and equal to death rate, so the growth is zero.

• Level of fertility rate that is compatible with stationery population is called replacement rate.
 Effects of Population Growth on
Economic Development
• Whether the increase in population positively contributes to the average citizen/average
product.
O=L*X
O is the output level, X is the output per worker, L is number of workers.
In per capita terms:
O/Population = L * X/Population
where, output per capita is product of share of population in labour force and output per
worker.

• Direct effect of population growth is on age structure. Abundance of youth creates a large
supply of people too young to work, this is called youth effect.

Country with slow population growth will have large population who has reached retirement
age, hence the situation is known as retirement effect.
 Diminishing Marginal Returns

• Most common way to enhance productivity is through capital accumulation.

• The lack of availability of savings for younger populations restricts capital accumulation.

• A negative effect of population growth on economic growth involves presence of fixed factors (land, raw
materials etc). Here the law of diminishing marginal productivity applies.

• In the presence of fixed factor (land)successive additions of variable factor (labour) eventually declines the
marginal productivity of variable factor.

• When marginal product of labour falls below average product then per capita income will decline as the
population increases.
Technological Progress and Law of Theory of Demographic Transition
Diminishing Returns

• This theory suggests that as the

• Not all models suggest that per capita
nations develop, they eventually
income will decline with increase in
population. Population growth
reach a point where birth rate
enhances per capita growth where falls.
technological progress and
economies of scale are considered. • Population growth and
environment: Induced innovation
• Economies of scale: when increases hypothesis and downward spiral
in inputs leads to increase in output hypothesis.
by more than proportionate increase
in inputs.
 Sustainability
• Concept
– Long term constancy of economic output, income or consumption (Economic)

– Long term preservation of biosphere (Ecological)

• Notions:

– Weak sustainability- maintenance of aggregate stock of capital, we can substitute human

made capital for natural capital K + H + SC + N > X*

– Where K is manmade capital, H is human capital, SC is Social Capital and N is natural capital,
X* is threshold level of all capital

– Strong sustainability- natural capital and manmade capital are complements and cannot be
substituted- economic growth utilizing natural capital will cause environmental degradation

– K>K*, H>H*, SC>SC*, and N>N*

 Principles and Paradigms of
Sustainability
• Renewable resources must be • Internalization of environmental
harvested at or below the rate of costs into macro and micro analysis
growth of predetermined stock of the
resource • Compliance with social and
environmental norms in working
• For non-renewable resources , towards economic growth
renewable substitutes must be
developed • Maximization of GDP to
“Environmentally Adjusted Net
• Pollution should be limited to Domestic Product” ENDP
assimilative capacity of the
environment

• Indicator of sustainability is Max

sustainable yield (MSY). Other
indicators are: land degradation,
depletion of groundwater, loss of
biodiversity, ozone depletion, etc.
Properties of Environmental Goods
• (i) Pure Public/Collective Goods- joint supply

• (ii) Mixed collective goods- used by many users, but the use of good is subtractable

• (iii) Public bads- unintended side effects

• (iv) Externalities- divergence of private costs and social costs

• Property rights-right to use and transfer environmental resources and ability to

exclude others
– Private or exclusive rights
– State property
– Common property
– Non-exclusive property (nobody’s property)

• Most env. Good s are CPRs or open access- Tragedy of commons Hardin 1968
 Cost- Benefit Analysis
• When an activity is not all-or-nothing,
comparisons between the additional benefits
and costs called marginal benefits and
marginal costs is made.
 Efficiency
• Utility: measure of satisfaction

• Social Welfare: collection of everyone’s utility

• Pareto efficiency: level of utility at which no one can be made better-off without
making anyone worse-off

• Pitfalls:
– Pareto efficiency is utilitarian- maximization of social welfare

– Pareto efficiency analysis is not useful when a policy helps some and harms others

• Egalitarian concept of efficiency

• Rawlsian concept of efficiency

 Types of efficiency
• For a firm profit maximizing point is where its Marginal Revenue (MR)
curve intersects it Marginal Cost (MC) curve.

• For consumption: efficient point is where MB=MC

• Efficiency is based on:

– What will be produced?
– What resources will be employed?
– Who will receive the final goods and services?
– When to produce or consume?
 Allocative Efficiency

• Marginal Utility (MU) • Marginal Rate of Transformation

(MRT)
• Marginal Rate of Substitution
(MRS) • Production Possibility Frontier

• Law of diminishing marginal • MRT measures marginal cost of

utility producing X relative to MC of
producing Y
– -MRTXY = - MCX / MCY
• Law of equi-marginal utility
• Allocative efficiency is achieved
when for a representative
consumer MRS=MRT

• MUY/MUX =PY/PX= MCY/MCX

 What goods and services should be produced?

• Allocative Efficiency: allocate the available

inputs to make socially optimal mix of
outputs.

• Production Possibility Frontier (PPF): locus of

output combinations that can be produced
when all inputs are used efficiently.
 With What resources should the goods and services be
produced?

• Production/technical efficiency

• Marginal Rate of Technical Substitution

RTSLK=MPL/ MPK

• Law of diminishing marginal returns

• Cost minimizing production condition is

MPK/ r = MPL/w
or w/r = MPL/ MPK
 Production Externalities
• Case of Steel Firm and Fisheries Firm
downstream
• Social Cost
• Pareto Efficient Production
• Socially Optimal Output
• Pollution Vouchers/Emission Credits trade
Methods of Abatement of Externalities
• Government action is required to rectify the market failure which is common in
case of environmental goods and services.

• Pigouvian Tax –Subsidy Approach

• This is done through interventions like

– Change in property rights for resource use

– Imperfect Information, transaction costs, Prisoner’s Dilemma, Dominant Strategy,
– Coasian Property Rights

– Policy instruments based on market incentives or taxes or subsidies

– Direct public investments

 Collective Choices
• Kaldor Hicks Compensation Criterion

• Tragedy of Commons
– Hardin’s thesis : incremental private benefits exceed incremental private costs,
thus individual rationality becomes collective irrationality.
• Co-owners of CPRs fail to cooperate:

– Perceived costs of cooperation are greater than perceived private benefits of

cooperating

– When individuals feel their contribution will be miniscule, thus they easily free
ride

– When individuals have no assurance that others will contribute

• Olson’s Theory
– Unless there is some coercion to make individuals act in their common
interest, the individuals will not achieve their common interests.
– Like also in perfectly competitive market