Natural Resources and

Environmental Economics:
Sustainability
RDP (8114)
MA Programs
Amuod University
 Development Challenges to LDC
• High population growth
• Rural population greater than urban population
• Low level of Agric production/ technology
• Food production less than the demand
• Low energy and protein consumption
• High number of illiteracy
• High level of poverty and food insecurity
 Cont…
• Scarce cultivable land and scarce water
• Land degradation (urbanization, soil erosion, )
• Tropical deforestation
• “Overharvesting” of fish
• Biodiversity loss (genes, species, habitats)
• Depletion of vital natural resources,
• Air, water and soil pollution by harmful,
poisonous or hazardous substances
• Global warming
 Introduction
• Natural resource and Environmental economics
emergence as distinct sub-discipline very recently.
• But Smith was the first writer to systematize the
argument for the importance of markets in
allocating resources.
• A central interest of the classical economists was
the question of:
 What determined standards of living and economic
growth?
 Cont…
• Natural resources seen as determinants of
national wealth and its growth.

• Classical economics saw value as arising from

the labour power embodied in output.

• Neoclassical economists explained value as

being determined in exchange, so reflecting
costs of production.
 Cont…
• In 1970s natural resources introduced into
neo-classical models of economic growth

• They systematically investigated the efficient

and optimal depletion of resources.

• The other development of a rigorous theory of

Welfare economics.
 Cont…
• It attempts to identify circumstances under
which it can be claimed that one allocation of
resources is better than another.
• Always markets do not attain efficiency in
allocation, and a state of ‘market failure’ may
exist.
• One manifestation of market failure is the
phenomenon of ‘externalities’.
 Cont…
• The problem of pollution is a major concern of
environmental economics.

 It is a class of externalities

• Environmental economics is also concerned

with the natural environment as a source of
recreational and amenity services.
 Cont…
• Natural resource economics and environmental
economics have largely distinct roots.

 The former emerged mainly out of neoclassical

growth economics,

 The latter out of welfare economics and the

study of market failure.
 Institution and Market Failure
• Institution are rules of the game
• It includes both formal rules and informal norms
and their enforcement characteristics.
• Formal constitutions, laws, property rights etc.
• Informal like norms
- It reduces uncertainty by providing a structure to every
day life.
• Institutions are designed to achieve efficient out
comes in the economy.
 Cont…
• Institutions, making economic environment
more conducive,
• It enable the market to function well, as
predicted by the neoclassical economists

 Property right institutions: that give an

individual incentive to invest and accumulate
in the economy.
 Cont…
 Regulatory institutions that regulate market
when the market fails to do so.

 Institutions for macro stabilization

 Cont…
 The institutions hypothesis also suggests:

- Those societies that have good institutions are

prosperous today and tend to be prosperous in the
future.
 Market Failures
• Implies that the market price of a good is not a
good measure of its value
• A market economy is under certain assumptions
optimal
• But what happens when these assumptions fail to
hold. In particular:
- Externalities (pollution) & Public goods
- Intertemporal problems & Ambiguous property rights
(fish, fresh air)
- Imperfect information
 Sustainability

Fundamental Concepts
 Sustainability Problem
• In the world human population has risen

• The material demands by the average individual

have been increasing rapidly.

• Many human beings now alive are desperately

poor.
• Polarized society across the world and within the
same society
 Cont…
• The world’s resource base is limited
• It contains a complex, and interrelated, set of
ecosystems
• The question is:
- Whether the global economic system can continue
to grow with-out undermining the nature.
- How to alleviate poverty in ways that do not affect
the natural environment.
 Sustainability Concepts
• Issues of fairness, equity and distribution of
future generations.
• It concerns the treatment of future generations.
- What legacy should earlier generations leave to
later ones?
• The current human generation should take
account of the interests of future generations.
 Fundamental questions
• How should equity, both inter and intra
generational, be handled?

• What do we leave to future generations to ensure

that they are not worse off?

• Should we leave the same physical stock of

resources?

• How far into the future do we worry about?

 Cont…
• What are the interests of future generations?

 A concern for sustainability derives from an

ethical concern for future generations.

• This needs to be incorporated into current

decision making process.
 Cont…
Sustainability is defined as...non-declining
utility of a society over time.
Preserving opportunities for future generations
A sustainable state is one in which the natural
capital stock is non-declining through time.
• Sustainable development is:
- Development that meets the needs of the present
without compromising the ability of future
generations to meet their own needs.
 Cont…
• Implications sustainability:
- It is possible for the current generation to use
resources as long as the interests of future
generations could be protected.
• Sustainability criterion suggests that:

- at a minimum, future generations should be

left no worse off than current generations.
 Dimensions of SD
• The three dimensions or pillars:
 Environmental, Economic and Social
1. the environment is the necessary basis for
sustainable development
2.the economy is the tool to achieve sustainable
development
3.the good life for all (the social dimension) is
the target of sustainable development
Elements of sustainability
Environment

Economy Society

- World Commission on Environment and Development, 1987

 Economic sustainability
• Economic sustainability in development theory

 ‘Economic sustainability’ implies a system of

production that satisfies present consumption
levels without compromising future needs.

• The notion of ‘economic sustainability’ was

originated by Hicks.
 Cont….
• Traditionally, economists, assuming that the
supply of natural resources was unlimited.
• They also believed that economic growth
would bring the technological capacity to
restock natural resources destroyed
Today, however, a realization has emerged that
natural resources are not infinite.
• The growing scale of the economic system has
strained the natural resource base.
 Cont….
• Economic sustainability is one constrained by
requirements of environmental sustainability.

– It restrains resource use to ensure the

‘sustainability’ of natural capital.
– It does not seek to achieve ‘economic
sustainability’ at the cost of ‘environmental
sustainability’.
 Social Sustainability

• Social sustainability in development theory

– ‘social sustainability’ implies a system of social
organization that alleviates poverty.

• Theories of social organization identifies a

negative linkage between sustained poverty
levels, and sustained natural resource
exploitation.
 Cont…
• The creation of a sustainable society also
depends fundamentally on the absence of:

 Violent conflict,
Many human rights abuses,
Humanitarian disasters and
Civil wars are closely linked to environmental
resources
 Environmental Sustainability
• Environmental sustainability in development
theory:

– Environmental sustainability requires maintaining

natural capital as both a provider of economic
inputs called ‘sources’ and an absorber called
‘sinks’ of economic outputs called ‘wastes’.
Cont…
 Institutions
• The fourth dimension of SD
• The role of institutions in SD is critically
important.
• Because the implementation of SD policy
requires institutional or organizational
involvement.
• The ignorance of the institutional dimensions
one of the biggest obstacles to sustainability.
Principles of Sustainable Development
 People are entitled to a healthy and productive life in
harmony with nature.
 Development today must not undermine the
development and environment needs of present and
future generations.
 Nations have the sovereign right to exploit their own
resources, but without causing environmental damage
beyond their borders.
 Nations shall develop international laws to provide
compensation for damage that activities under their
control cause to areas beyond their borders.
 Cont…
 Nations shall cooperate to conserve, protect and restore
the health and integrity of the Earth's ecosystem.
 Nations should reduce and eliminate unsustainable
patterns of production and consumption, and promote
appropriate demographic policies.
 Environmental issues are best handled with the
participation of all concerned citizens.

 Nations shall facilitate and encourage public awareness and

participation by making environmental information widely
available.
 Cont…
 The polluter should, in principle, bear the cost
of pollution.

 Nations shall warn one another of natural

disasters or activities that may have harmful
transboundary impacts.
 Cont…
 Sustainable development requires better
scientific understanding of the problems.
Nations should share knowledge and innovative
technologies to achieve the goal of sustainability
 The full participation of women is essential to
achieve sustainable development
 Peace, development and environmental
protection are interdependent and indivisible.
 Is sustainability is feasible?
• Robert Solow has criticized:

“ This is a damagingly narrow way to pose the

question. We have no obligation to our
successors to bequeath a share of this or that
resource”
 Cont…
• The permanent technical progress allow us for
sustainability.
• Sustainability require either a relatively higher
degree of substitutability between resource
and capital.
• The presence of a permanent backup
technology.
The efficient and Optimal use of
natural resources
 Resources Economics
• Natural resources include:

• Air, water,
• Earth’s crust and
• Radiation from the sun
• Ecosystem
• etc
 Classification of resources
Resource

Renewable Resources Non Renewable

-Rang land Resources
-Livestock -Oil
-Fishery -Natural Gas
-Forestry -Minerals
-etc
 Environment and Economy
• The economy is assumed to depend on the
natural environment for three distinctive
purposes :

– Resources
– Disposal and assimilation of wastes; and
– Consumption of environmental amenities.
 Environment and Economy
Relationship
Factors of
production

The Natural
Wastes The Economy
Environment

Environmental
amenity
 Simple optimal depletion model
• The economy produces a single good, Q,
which can be either consumed or invested.
• Consumption increases current well-being,
• Investment increases the capital stock,
permitting greater consumption in the future
• The production function:
Q Q( K , R)
 Cont…
• The above function do not tell us particular
for of relationship.

• One possible type of production technology is

the Cobb–Douglas form, consisting of the
class of functions.
Q  AK  R 
Is the natural resource is essential?
• The optimal resource depletion path through
time will be influenced by whether the natural
resource is ‘essential’.
• Essentialness of a resource could mean several
things.
 First, a resource might be essential as a waste
disposal and reprocessing agent.
 A resource might also be essential for human
psychic satisfaction.
 Cont…
 Thirdly, some resource might be ecologically
essential in the sense that some or all of a
relevant eco-system cannot survive in its
absence.

 Fourth, resource is directly essential for

production.
 Cont…
• A productive input R is essential if Q=Q(K,
R=0) =0 for any positive value of K.

• In the case of the CD production function, R

and K are both essential, as setting any input
to zero in Q=0.
 Cont…
• Non-renewable resources exist in finite
quantities.
- It is not possible to use constant and positive
amounts of them over infinite horizons.
• If a resource is essential, production can only
be under-taken if some positive amount of the
input is used.
• This seems to suggest that production and
consumption cannot be sustained indefinitely.
Optimal resource depletion: Non-
renewable resources
 Introduction
• Non-renewable resources include fossil-fuel
energy supplies oil, gas and coal and
minerals copper etc.
• They are formed by geo-logical processes over
millions of years.
• What is the optimal extraction path overtime
for any particular non-renewable resource
stock?
 Major assumption
• The resource markets are competitive.
• The model used is simple.
• It is convenient to begin with a model in which
only two periods of time are considered.
• we assume that utility comes directly from
consuming the extracted resource.
 Cont…
• we do not take any account of adverse external
effects arising from the extraction or
consumption of the resource.
• It is assumed that there exists a known, finite
stock of each kind of non-renewable resource.

– New discoveries are made, increasing the

magnitude of known stocks.
 A non-renewable resource two-period
model
• Consider a planning horizon that consists of
two periods, period 0 and period 1
• There is a fixed stock of known size of one
type of a non-renewable resource.
• The initial stock of the resource (at the start of

period 0) is S denoted .
• Let Rt be the quantity extracted in period t
 Cont…
• Assume that an inverse demand function
exists for this resource at each time, given by
Pt a  bRt
• The demand function for the two period is
given:
P0 a  bR0

P1 a  bR1
 Cont…
• A linear and negatively sloped demand
function shows that demand goes to zero at
some price, in this case the price a.
• Implication:
– Hence, either this resource is non-essential or it
possesses a substitute which at the price a
becomes economically more attractive.
 Cont…

a a

P=a-bRt

o Rt a\b
 Cont…
• The area oawRt in figure above algebraically,
the integral of P with respect to R over the
interval R=0 to R=Rt.
• It shows the total benefit consumers obtain
from consuming the quantity Rt in period t.

• From a social point of view, this area

represents the gross social benefit, B.
 Cont…
i.e
Rt

B ( Rt )  ( a  bR ) dR
0

b 2
aRt  Rt
2

where the notation B(Rt) is used to make explicit the fact

that the gross benefit at time t(Bt) is dependent on the
quantity of the resource extracted and consumed (Rt).
 Cont…
• Then total extraction costs, Ct, for the
extracted quantity Rt units will be
Ct cRt
• The total net social benefit from extracting the
quantity Rt is

NSBt= Bt-Ct
 Cont…
• Hence,
Rt

NSB ( Rt )  (a  bR)dR  cRt

0

b 2
aRt  Rt  cRt
2
•
 A socially optimal extraction
policy
• In order to find the socially optimal extraction
programme, two things are required.
• The first is a social welfare function that
embodies society’s objectives;
• The second is a statement of the technical
possibilities and constraints available at any
point in time.
 Cont…
• So the general two-period social welfare function
W W (u0 , u1 )
• takes the particular form u1
W u0 
1 
• where ρ is the social utility discount rate,
reflecting society’s time preference.
• Now regard the utility in each period as being
equal to the net social benefits in each period
 Cont…
• Given this, the social welfare function may be
written as
NSB1
W  NSB0 
1 

• Only one relevant technical constraint exists in

this case:
• There is a fixed initial stock of the non-renew-

able resource. R  R S
0 1
 Cont…
• The optimisation problem can now be stated
mathematically
• Max NSB1
W  NSB0 
1 
• Subject to 
R0  R1 S

• There are several ways of obtaining solutions to

constrained optimisation problems of this form.
 Cont…
• The first step is to form the Lagrangian
function, L:

NSB1 
L W   ( S  R0  R1 ) NSB0    ( S  R0  R1 ) 
1 
• b 2  b = 

  2
 ( S  R0  Rt )
aR 
 0 2 0R  cR0 
  aR1  2 R1  cR1  / 1   
 
Renewable Resources
 Introduction
• Environmental resources are described as
renewable when they have a capacity for
reproduction and growth.
• It includes populations:
- fisheries
- forests
- water and atmospheric system.
 Cont…
• It is also conventional to classify arable and
grazing lands as renewable resources.

• A broad concept of renewables would also

include flow resources such as solar, wave,
wind and geothermal energy.

• Many forms of energy-flow resources are, for all

practical purposes, non-depletable.
 Cont…
• The economics of renewable resources is about
two things:
– the harvesting of animal species fishing
– the economics of forestry

• It is important to distinguish between stocks and

flows of the renewable resource.

• The stock is a measure of the quantity of the

resource existing at a point in time.
 Cont…
• The flow is the change in the stock over an
interval of time.

• One similarity between renewable and non-

renewable resources is that both are capable of
being fully exhausted.
 Cont….
• Non-renewable resources, exhaustibility is a
consequence of the finiteness of the stock.

• For renewable if rates of harvesting

continually exceed net natural growth.

• It is evident that enforceable private property

rights do not exist for many forms of
renewable resource.
 Cont…
• In the absence of regulation or collective
control over harvesting behavior, the resource
stocks are subject to open access.

• Open-access resources tend to be over-

exploited in both a biological and an economic
sense.
 Cont…
• We begin by setting out a simple model of the
biological growth of a fish population.

• It is examined under two sets of institutional

arrangements:
- an open-access fishery and
-a profit-maximisin fishery in which
enforceable private property rights exist.
 Biological Growth processes
• In order to investigate the economics of a
renewable resource.
• we consider the growth function for a
population of some species of fish.

• We suppose that this fishery has an intrinsic

(or potential) growth rate denoted by g.
 Cont…
• Suppose that the population stock is S and it
grows at a fixed rate g.
• Then in the absence of human predation the
rate of change of the population over time is
given by:
dS 
S  gS
dt
• By integrating this equation, we obtain an
expression for the stock level at any point in
time
 Cont…
• Hence,
gt
S t S 0 

• Using the symbol χ to denote the actual

growth rate, the growth function can then be
written as:
.
S  ( S ) S
 Cont…
• Alternative logistic growth:

G(S)

S
S min S max
S msy

• The logistic form is a good approximation to the natural

growth processes of many fish, animal and bird populations.
 Steady–state Harvest
• Consider a period of time in which the amount of
the stock being harvested (H)is equal to the
amount of net natural growth of the resource (G).

• Suppose also that these magnitudes remain

constant over a sequence of consecutive periods.

• We call this steady-state harvesting, and refer to

the (constant) amount being harvested as a
sustainable yield.
 Cont…

• Defining S as the actual rate of change of the
renewable resource stock, with S =G−H,


• It follows that in steady-state harvesting S =0
and so the resource stock remains constant
over time.

• What kinds of steady states are feasible?

 Cont…
• Steady state harvesting

Gsmy=Hmsy

G1=H1

0 S1l Smsy S1u Smax

 An open-access fishery
• The open-access fishery model shares two of the
characteristics of the standard perfect competition
model.

• If the fishery is commercially exploited, it is assumed

that this is done by a large number of independent
fishing‘ firms’.

• Second, there are no impediments to entry into and

exit from the fishery.
 Cont…
• The open-access model has two components:

1.a biological sub-model, describing the

natural growth process of the fishery;

2.an economic sub-model, describing the

economic behaviour of the fishing boat
owners.
 Biological sub-Model
• Growth function is the simple logistic growth
model given by:

dS
G ( S ) gS
dt

• In the absence of harvesting and other human

interference, the rate of change of the stock
depends on the prevailing stock size.
 Economic sub-model
• we may take harvest to depend upon the effort
applied and the stock size. That is:
H H ( E , S )
• This relationship can take a variety of
particular forms.

H eES
 The costs, benefits and profit of
fishing
• The total cost of harvesting, C, depends on the
amount of effort being expended.
C wE

• The gross benefit will depend on the quantity

harvested,
 Cont….
• The revenue obtained from a harvest H is
given by,
B PH
• Fishing profit is given by
NB =B−C

NB PH  wE
 Bioeconomic equilibrium
• We close our model with two equilibrium
conditions that must be satisfied jointly.
• Biological equilibrium occurs where the resource
stock is constant through time (that is, it is in a
steady state).
G H
• Economic equilibrium requires that the amount of
fishing effort be constant through time.
NB =B−C=0
 Renewable resources policy
• What goals might one reasonably expect of
governmental policy towards the use of renewable
resources?
• Policy may be directed towards removing
externalities, improving information, developing
property rights, removing monopolist industrial
structures, and using direct controls or fiscal
incentives to alter rates of harvesting whenever
there is reason to believe that harvesting
programmes are inefficient.
Forest Resources
 Introduction
• More than 1.6 billion people depend to varying
degrees on forests for their livelihoods.

• In developing countries about 1.2 billion people

rely on agroforestry.

• provide employment for 60 million people.

• Some 1 billion people depend on drugs derived
from forest plants
 Cont…
• Forest resources can be divided into three
categories:

1. Natural forests,
2. Semi-natural forests,
3. Plantation forests.
 Cont…
• Forests are multi-functional they directly provide:
- Timber,
- Fuel wood,
- Food, water for drinking
- Stocks of genetic resources, and
- Other forest products.
- Woodlands are capital assets that are
intrinsically productive.
 Characteristics of Forest
• Trees typically exhibit very long lags between
the date at which they are planted and the date
at which they attain biological maturity.

• A tree may take more than a century to reach

its maximum size.

• The length of time between planting and

harvesting is usually at least 25years, and can
be as large as 100 year
 Cont…
• Plantation forestry is intrinsically more
controllable than commercial marine fishing.

• Trees occupy potentially valuable land. The land

taken up in forestry often has an opportunity
cost.

• Tree populations do not migrate spatially, and

population growth dynamics are simpler.
 Cont…
• Many areas of natural forest are de facto open-
access resources.
• open-access fisheries have a built-in defence
against stocks being driven to zero: as fish
numbers decline to low levels, marginal
harvesting costs rise sharply.
• It usually becomes uneconomic to harvest fish
to the point where stock levels have reached
critical minimum levels.
 Cont…
• Trees are not mobile and harvesting costs tend
to be affected very little by the stock size.

• So as long as timber values are high, there is

no in-built mechanism stopping stock
declining to zero.
 Commercial plantation forestry
• Here we dealing with efficient timber
extraction.
• We begin with one of the most simple forest
models, the single-rotation commercial forest
model.
• Despite its lack of realism, this model offers
useful insights into the economics of timber
harvesting.
 A single-rotation forest model
• Suppose there is a stand of timber of uniform
type and age.

• All trees in the stand were planted at the same

time, and are to be cut at one point in time.

• Once cut down, the forest will not be

replanted. So only one cycle or rotation plant,
grow, cut is envisaged.
 Assumption

• The land has no alternative uses so its

opportunity cost is zero.

• Planting costs (k), marginal harvesting costs

(c) and the gross price of felled timber (P) are
constant over time.

• The forest generates value only through the

timber it produces, and its existence (or
felling) has no external effects.
 Cont…
• Looked at from the point of view of the forest
owner
• what is the optimum time at which to fell the
trees?
• The answer is obtained by choosing the age at
which the present value of profits from the
stand of timber is maximized.
 Cont…
• Profits from felling the stand at a particular age of
trees are given by the value of felled timber less
the planting and harvesting costs.

• If the forest is clear-cut at age T, then the present

value of profit is
 iT  iT
( P  c ) ST   k  pST   k
• Where ST the volume of timber available for
harvest at time T.
 Cont…
• The present value of profits is maximised at
that value of T which gives the highest value
for
 iT
pST   k
• To maximize this quantity, we differentiate the
above equation with respect to T, using the
product rule, set the derivative equal to zero
and solve for T.
 Cont…
• The single-rotation model we have used shows
that the optimal time for felling will depend
upon the discount rate used.
• They have inverse relationship between the
time and discounting rate
i
 Deforestation
• Until the second half of the 20th century,
deforestation largely affected temperate regions.

• North Africa and the Middle East now have less

than 1% of land area covered by natural forest.

• It is estimated that only 40% of Europe’s original

forestland remains, and most of what currently
exists is managed secondary forest or plantations.
 Cont…
• And it is tropical deforestation that is now
perceived as the most acute problem facing
forest resources.
• In the thirty years from 1960 to 1990 one-fifth
of all natural tropical forest cover was lost, and
• the rate of deforestation increased steadily
during that period.
 Government and forest resources
• Given the likelihood of forest resources being
inefficiently allocated and unsustainably
exploited, there are strong reasons why
government might choose to intervene in this
area.
• For purely single-use plantation forestry, there is
little role for government to play other than
guaranteeing property rights so that incentives to
manage timber over long time horizons are
protected.
 Cont…
• Governments might attempt to internalise
externalities by fiscal measures or by the
regulation of land use.

• Alternatively, public ownership of forestland

may be used as a vehicle for promoting
socially efficient forest management.
Environmental Economics

PART-II
Environmental problems
 Damage to Ecosystems
• Ecosystems are the complex and dynamic
relationships between forms of life and the
environments they inhabit.

• Over the past 50 years, humans have altered

ecosystems more rapidly and extensively than
in any other comparable period of time in
history.
 What is ecosystem?
• Ecosystems are dynamic interrelated
collections of living and non-living
components.
• The living and non-living components affect
each other in complex exchanges of energy,
nutrients and wastes.
• The characteristic exchanges within an
ecosystem are called ecosystem functions.
 Cont…
• For an ecosystem to exist and continue its
function, plant and animal life must be present.

• For plants and animals to survive, energy from

the sun in the form of light is needed to sustain
the whole ecosystem.

• Plants use the energy from the sun to jump start

the transfer of energy between and among living
organisms.
 Cont…
• Man’s survival is dependent on the processes
of the ecosystem.

 His survival also depend on energy from

plants to sustain life.

• Destroying any of the components crate

problem.
 Cont…
• The climate change variables considered :
– the CO2 fertilization effect of increased
greenhouse gas concentrations in the atmosphere;
– increasing mean, maximum and minimum
temperatures;
– gradual changes in precipitation
– increase in the frequency, duration and intensity
of dry spells and droughts;
 Cont…
– changes in the timing, duration, intensity and
geographic location of rain
– increase in the frequency and intensity of floods;
– greater seasonal weather variability
 Depletion of Natural Resources
• Freshwater resources are being consumed by
agriculture, by industry, and for domestic use.
• More than 1 billion people lack access to clean
water
• The demand for new land, fuel, and raw materials
resulted in deforestation, the conversion of forest
land to non forest land.
• Desertification is the degradation of semiarid
land, which results in the expansion of desert land
that is unusable for agriculture.
 Air Pollution
• Linked to heart disease, lung cancer, and
respiratory ailments, such as emphysema,
chronic bronchitis, and asthma.
• In Europe, the annual loss of life due to air
pollution is greater than that due to car
accidents.
• In the U.S., 60% of the population lives in
countries that have unhealthful levels of smog
or particulate air pollution.
 Cont…
• In addition to air pollution, there are also noise
and offensive odors, which are mainly related
to human senses and are now regarded as
important issues in environment.
• Noise is a problem closely related to daily
living among various types of pollution and
the sources vary greatly.
Indoor Air pollution
• Indoor air pollution is a
serious problem in
developing countries.
• As woman cooks food
for her family, she is
exposed to harmful air
contaminants from the
fumes.
 Acid Rain
• Acid rain originates from the emissions of a
variety of pollutants that are subsequently
chemically converted into acid form,
particularly sulphuric and nitric acids.
• Air pollutants, such as sulfur dioxide and
nitrogen oxide, mix with precipitation to
pollute rain, snow, and fog that contaminate
crops, forests, lakes, and rivers.
 Cont…
• Increased acidity of lakes
 As a result of the effects of acid rain, all
the fish have died in a third of the lakes in
NewYork's Adirondack Mountains.

• Increased acidity of soils which reduces the

number of plants that may be grown
• Forest destruction
 Global Warming
• Economic activity gives rise to flows of green-
house gas (GHG) emissions.
• Greenhouse gases are uniformly mixing
pollutants; the geographical location of the
pollution impacts is independent of the location of
the emission source.
• Since all nations are emitters and each is affected
by the emissions of all others, greenhouse gas
emissions can be thought of both as a reciprocal
spillover problem and as a global public ‘bad’.
 Cont…
• The principal GHG carbon dioxide derives mainly
from fossil fuel use, but an important contribution is
also made by deforestation.
• Climate change is driven by the atmospheric
concentration of green-house gases, and by the rate
of change of those concentrations through time.
- Shifts in plant and animal habitats and extinction of
some species.
- Melting of glaciers and permafrost, resulting in rise
in sea level.
 Destruction of the Ozone Layer

• Ozone layers being depleted globally except over

tropical areas and the rate of depletion is higher in
the highest latitude regions..
• There are several ways in which human impacts
on the ozone layer take place.
• The dominant anthropogenic cause of ozone
depletion appears to be the emission of
chlorofluorocarbon (CFC) gases into the
atmosphere.
• What would be the effects of a continuing
depletion of the atmospheric ozone layer?
 Cont…
• The consequences follow from the fact that
ozone plays a natural, equilibrium-maintaining
role in the stratosphere through
(a)absorption of ultraviolet (UV) radiation
(b)absorption of infrared (IR) radiation
The absorption of IR radiation implies that
CFC sub-stances are greenhouse gases,
contributing to global climate change.
 Cont…
• The ozone layer protects living organisms
from receiving harmful UV radiation.
• It is now virtually certain that ozone depletion
has increased the incidence of skin cancer
among humans.
 Nuclear Waste
• Radioactive waste from nuclear power plants
and weapons production is associated with
cancer and genetic defects.
• Radioactive plutonium, used in nuclear power
and weapons production, has a half-life of
24,000 years.
• Disposal of nuclear waste is risky and costly,
 What DoYou Think?
• More than 380 billion plastic bags are used in
the U.S. annually, and only .6% are recycled
• Most plastic bags, which contain toxic
chemicals, end up in landfills where it takes
1,000 years for them to degrade.
• In 2007, San Francisco became the first U.S.
city to ban plastic bags.
• Would you support a ban on plastic bags in
your community?
 Biodiversity
• The great variety of life forms on Earth.
• Threats to biodiversity:
◦ Primary cause of species decline is human-
induced habitat destruction
◦ Estimates suggest that at least 1,000 species of
life are lost each year.
 Social Causes of Environmental
Problems
• Population growth

• Industrialization and economic development

• Attitudes such as individualism, materialism

Cont…
 What we can do?
• Environmentally friendly buildings.
 Cont…
• Smart cars: Small, fuel-efficient cars like this
one are common in Europe .
Green Belt Movements
• Green Belt Movement
The 2004 Nobel Peace
Prize was awarded to
Wangari Maathai for
leading a grassroots
environmental
campaign, Green Belt
Movement, which is
responsible for planting
30 million trees across
Kenya.
Pollution: Targets and Control

III
 Introduction
• In thinking about pollution policy, the economist
is interested in two major questions.

 How much pollution should there be?

 What is the best method of achieving that level?
• The use of efficiency as a way of thinking about
how much pollution there should be dates back
to the work of Pigou (1920).
 Cont…
• Pollution can be associated with resource
extraction and use.

• Residuals from economic processes are

returned to various environmental receptors
(air, soils, biota and water systems).
 Pollution problems
Economic
Activities

Emission

Absorption of some Non absorbed

flows in to harmless emission flows

Accumulation of
Pollutant stock

Degradation of Stock
stock into pollutant
harmless form damage
Flow pollution
damage
Pollution
Damage
 Pollution flows, pollution stock and
pollution damage
• Pollution can be classified in terms of its damage
mechanism.
• Flow-damage pollution: occurs when damage
results only from the flow of residuals: that is, the
rate at which they are being discharged into the
environmental system.
• Stock-damage pollution: describes the case in
which damages depend only on the stock of the
pollutant in the relevant environmental system at
any point in time.
 Cont…
• Most important pollution problems have the
attribute of a stock-damage pollution effect being
present.

• The most prominent are those which affect human

health and life expectancy.

• Stock pollution levels influence plant and timber

growth, and the size of marine animal populations.
 Cont…
• Using M to denote the pollution flow, A to
denote the pollution stock and D to denote
pollution damage, we therefore have two
variants of damage function:

Flow damage function D=D(M)

Stock damage function D=D(A)

 The efficient level of pollution
• We now investigate how pollution targets can be
set using an efficiency criterion.

• Given that pollution is harmful, some would

argue that only a zero level of pollution is
desirable.
• Do zero pollution is possible?
• Do you think that pollution is beneficial?
• If yes in what sense is pollution beneficial?
 Cont…
• Producing some goods and services that we do
find useful may not be possible without
generating some pollution.

• More generally, goods might only be producible

in non-polluting ways at large additional expense.

• Thus, relaxing a pollution abatement constraint

allows the production of goods that could not
otherwise have been made, or to produce those
goods at less direct cost.
 A static model of efficient flow
pollution
• With both benefits and costs, economic decisions
about the appropriate level of pollution involve
the evaluation of a trade-off.

• In this model, emissions have both benefits and

costs.
• In an unregulated economic environment, the
costs associated with production of the intended
good or service are paid by the producer.
 Cont…
• The costs of pollution damage are not met by the firm,
are not taken into account in its decisions, and so are
externalities.

• Suppose that damage is independent of the time or source

of the emissions and that emissions have no effect outside
the economy being studied.

• An efficient level of emissions is one that maximizes the

net benefits from pollution.

• Net benefits are defined as pollution benefits minus

pollution costs (or damages).
 Cont…
• Flow pollution, damage (D) is dependent only on
the magnitude of the emissions flow (M), so the
damage function can be specified as:
D=D(M)
• Suppose for the sake of argument that firms were
required to produce their intended final output
without generating any pollution.

• Now consider what will happen if that

requirement is gradually relaxed.
 Cont…
• When amount of allowable emissions rises,
firms can increasingly avoid the pollution
abatement costs that would otherwise be
incurred.

• Therefore, firms make cost savings (and so

profit increases) if they are allowed to generate
emissions in producing their goods.
B=B(M)
 Cont…
• The social net benefits (NB) from a given level of
emissions are defined by

NB =B(M) − D(M)

• It will be convenient to work with marginal,

rather than total, functions.

• Thus dB/dM(or B′(M) in an alternative notation)

is the marginal benefit of pollution and dD/dM(or
D′(M)) is the marginal damage of pollution.
 Cont…
D(M),B(M) D(M)

B(M)
Max net benefit

M
dD/dM



dB/dM

M M
 Cont…
• To maximize the net benefits of economic
activity, we require that the pollution flow, M,
be chosen so that
dNB ( M ) dB ( M ) dD ( M )
  0
dM dM dM

or, equivalently, that

dB ( M ) dD ( M )

dM dM
 Cont…
• which states that the net benefits of pollution
can be maximized only where the marginal
benefits of pollution equal the marginal
damage of pollution.

• This is a special case of the efficiency

condition for an externality.
 Numerical example
• Suppose that the total damage and total benefits
functions have the following particular forms:

D M 2 forM  0

B 96M  0.2 M 2 for 0 M 240

• What is the optimal level of pollution?

• What is total net benefit?
 Efficient levels of emission of stock
pollutants
• The majority of important pollution problems are associated
with stock pollutants.
• Pollution stocks derive from the accumulation of emissions
that have a finite life.

• The distinction between flows and stocks now becomes

crucial for two reasons.

• First, without it understanding of the science lying behind

the pollution problem is impossible.

• Second, the distinction is important for policy purposes.

 Cont…
• While the damage is associated with the pollution
stock, that stock is outside the direct control of
policy makers.
• Environmental protection agencies able to control
the rate of emission flows.
• It more convenient to target emissions rather than
stocks.
• Given that what we seek to achieve depends on
stocks but what is controlled or regulated are
typically flows, it is necessary to understand the
linkage between the two.
 Pollution control where damages
depend on location of the emissions
R1

R2

S1 S2

R3
R4
 Cont…
• S1 and S2, that are located near four urban
areas, R1, R2, R3and R4.
• These areas contain populations whose health
is adversely affected by local ambient
concentrations of the pollutant.
• Our interest lies in the amount of pollution
these areas called ‘receptors’ receive from the
emission sources.
 Cont…
• Now consider the extent of pollutant dispersion
and mixing.
• Mixing of a pollutant refers to the extent to which
physical processes cause the pollutant to be
dispersed or spread out.
• One possibility is that emissions are ‘uniformly
mixing’ (UM).
• A pollutant is uniformly mixing if physical
processes operate so that the pollutant quickly
becomes dispersed to the point where its spatial
distribution is uniform.
 Cont…
• Most air, water and ground pollutants are not uniformly
mixing.
• Suppose that the principal determinants of the spatial
distribution of the pollutant are wind direction and
velocity.
• Clearly, emissions from S1 are going to matter much
more for the four receptor areas than emissions from
S2.
• Further more, looking at emissions from S1 alone,
these are likely to raise pollutant concentration levels to
a greater amount in R1 than in the other three receptors.
• R4 is likely to suffer the least from emissions by either
source.
 Cont…
• There will not be a single relationship between
emissions and concentration over all space.
• A given total value of M will in general lead to
differentiated values of stock across receptors.
• Non-uniform mixing is of great importance as many
types of pollution fall into this category. Examples
include ozone accumulation in the lower atmosphere,
oxides of nitrogen and sulphur in urban air sheds,
particulate pollutants from diesel engines and trace
metal emissions.
• Many water and ground pollutants also do not
uniformly mix.
 Intertemporal analysis of stock
pollution
• Consider the case of stock pollutants that have a
relatively long active life span.
• Persistence of pollution stocks overtime means
that the temporal dimension is of central
importance.
• An efficient pollution control programme will
need to take account of the trajectory of
emissions over time, rather than just at a single
point in time.
 Cont…
• The model we use to examine pollution targets
is the simplest possible one that can deal with
the intertemporal choices involved.
• Hence our damage and (gross) benefit
functions have the general forms.

Dt D ( At )
Bt B ( M t )
 Cont…
• The variables A and M in equations and are, of
course, not independent of one another.
• With relatively long-lived pollutants, emissions
add to existing stocks and those stocks
accumulate overtime.

At M t  At
• The parameter α is a proportion that must lie in
the interval zero to one.
• A pollutant for which α=0 exhibits no decay.
 Cont…
• This is known as a perfectly persistent pollutant.
• In this special case, integration of equation shows
that the stock at any time is the sum of all
previous emissions.
• Notice that the absence of decay means that
damages arising from current emissions will last
indefinitely.
• This is approximately true for some synthetic
chemicals, such as heavy metal residuals, and
toxins such as DDT and dioxin.
 Cont…
• The pollution stock and pollution damages will
increase without bounds through time as long
as M is positive.

• The relationship between M and A is not

independent of time. By integrating equation
over time we obtain: t
At ( M t  At ) dt
0
 Pollution control instruments
• The analysis will be quite general. That is, we
will be thinking about instruments in the
context of ‘pollution problems’ in general,
rather than separately for:
- air pollution
-water pollution
-soil contamination and so on
Criteria for choice of pollution control
instruments
• There are many instruments available to an
EPA charged with attaining some pollution
target.
• How should it choose from among these?
• If attaining the target were all that mattered,
instrument choice would be relatively simple.
• The best instrument would be the one which
meets the target with greatest reliability.
 Cont…
• Each available instrument can be characterised
by a set of attributes, relating to such things as
impacts on income and wealth distribution and
the costs imposed in abating pollution.
• A score can be given to each instrument,
dependent on how well its attributes match
with the set of objectives sought by the EPA.
 Cost efficiency and cost-effective
pollution abatement instruments
• Suppose a list is available of all instruments which
are capable of achieving some predetermined
pollution abatement target.
• If one particular instrument can attain that target at
lower real cost than any other can then that
instrument is cost-effective.
• Using a cost-effective instrument involves
allocating the smallest amount of resources to
pollution control, conditional on a given target
being achieved.
• It has the minimum opportunity cost.
 Cont…
• There will (usually) be many sources of an
emission this raises the question of how the over
all target should be shared among the sources.

• A necessary condition for abatement at least cost

is that the marginal cost of abatement be
equalised over all abaters.
• This result is known as the least-cost theorem of
pollution control.
 Numerical example
• Suppose government wishes to reduce the total
emission of a particular pollutant from the
current, uncontrolled, level M (say, 90 units
per period) to a target level M* (say, 50 units).
• This implies that the abatement target is 40
units of emission per period.
• Emissions arise from the activities of two
firms, A and B. Firm A currently emits 40
units and B 50 units.
 Cont…
• The quantity of pollution abatement by the ith
firm is Zi


Z i M i  M i

• Suppose that the total abatement cost

functions of the two firms are:
2
C A 100  1.5Z A C B 100  2.5Z 2 B
 Cont…
• The marginal abatement cost functions are
MCA=3ZA and MCB=5ZB.
• The least-cost solution is obtained by finding
levels of ZA and ZB which add up to the
overall abatement target Z=40 and which
satisfy the least-cost condition that
MCA=MCB.
• This gives the answer ZA =25 and ZB=15.
 Institutional approach of
internalization of externality
• One approach to achieving emissions, or other
environmental policy, targets is to improve existing
social or institutional arrangements.
• Improve the effectiveness of property rights regimes
in bringing about socially efficient allocations of
resources.
• Encourage greater social responsibility in making
choices and taking decisions.
• Bargaining between the polluter and the victim
• These potentially preventing the emergence of
externalities, or internalising externalities which
have arisen.
 Bargaining solutions and the limitations on
bargaining solutions to environmental problems
• Efficient bargaining outcomes are often hard
to obtain, and are sometimes impossible.
These limitations are particularly likely for
many kinds of environmental problem.
• First, the likelihood of bargaining taking place
is low unless enforceable property rights exist.
• For many environmental resources, well
defined and enforceable property rights do not
exist.
 Cont…
• Another issue relates to the possibility of
intertemporal bargaining, including bargaining
between current and future generations.
• Many environmental externalities cut across
generations our behaviour today imposes
externalities on future persons.
• While bargaining between affected individuals
at one point in time seems feasible, it is
difficult to imagine for future generation.
 Command and control instrument
• The dominant method of reducing pollution in most
countries has been the use of direct controls over
polluters.
• This set of controls is commonly known as command
and control instruments.
• Command and control instruments operate by imposing
mandatory obligations or restrictions on the behaviour
of firms and individuals.

- Non transferable emission license

- Minimum technological requirments like
(BAT)
- Location
 Economic incentive instruments
• Incentive-based instruments work by creating
incentives for individuals or firms to
voluntarily change their behaviour.

• Taxes and transferable permits create markets

for the pollution externality.
Thank you!