WERABE UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF AGRICULTURAL ECONOMICS

NATURAL RESOURCE AND ENVIRONMENTAL ECONOMICS

ASSIGNMENT TWO (2)

SUBMITTED TO TESHALE W.(PhD)

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

DEC15, 2023
WERABE, ETHIOPA

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Table of Contents

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1. First
First you are expected to describe/discuss the nature of the environmental
problem and identify both direct and indirect causes of the environmental/
natural resource problem. Also identify the firm/company, which has been
responsible for the problem
Mendifa wetland are found in silti zone with in silti-District. The local community
basically households from the District use the Mendifa wetland for different purpose such as
for agricultural purpose, home use, cloth washing and animal drink.
But, today the wetland is under high pressure due to high population growth and scarcity of
farm land and lack of proper management.
The major human factors leading to the degradation of the wetland include conversion to
agriculture expansion, human settlement, overgrazing, deforestation, eucalyptus plantation,
sand and stone extraction and overexploitation of wetland resources.
These problems are emanated from the mismanagement situation. Wetland conversion often
results in water depletion, the displacement of populations, the destruction of traditional
production systems, habitat degradation, salinisation, increases of waterborne diseases and
other adverse ecological impacts . occurrence of flood and erosion, lack of water access,
decreasing of crop yield, and loss of biodiversity and climate change are the major impacts
of wetland degradation.
The major determinants the Mendifa wetland degradation wetlands in the area are being
encroached over time by the local community and other investment activities and also
degrade are farming activity along wetland, settlement expansion, overgrazing and
deforestation. farming activity along wetland were the major triggers of Mendifa wetland
degradation. The results reveal that arable farming is one of the main practices by the
indigenous communities living along these areas and which contributes to wetland
degradation.
identify the firm/company, which has been responsible for the problem
mendifa cultivation is rampant along the wetland due to inadequate knowledge on how to
perform sustainable agriculture within the area; this therefore leads to wetland degradation
and Improper farming methods and poor tillage systems, which contribute towards the
erosion of steep cultivated land and human settlement are amongst the most serious of
problems in the area ; Farming along the wetland not only disturbs wetland shore ecology

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

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

 Describe the unintended effects(extenalities

 The number of population in the area was increased
 the agricultural area remains the same so that the community is forced to convert and
clear wetlands to other land use forms/modifications in an unsustainable way.
 over- utilizing the resources and brought the scarcity of land, deforestation, over use of
lake’s water and soil erosion from the catchment.
 the socio-economic benefits and ecosystem services of the wetlands and considered as
waste lands.
3. Third

What Is Neoclassical Economics?

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

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KEY TAKEAWAYS

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

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

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

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

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

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

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

Understanding Neoclassical Economics

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

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

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

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

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

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

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

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

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

If the factory can dispose freely of its waste in the environment, without paying for it, the
cost of pollution is not taken into account when deciding the optimum level of production.
As a result, the volume of production maximizing the producer’s private profit is higher
than that guaranteeing the social optimum. The solution proposed for this market failure is
that of internalizing externalities by integrating them into the economic calculus of
maximizing actors. Different instruments have been proposed in order to achieve this goal:
giving a price to free environmental resources, taxing the polluter, introducing regulation,
attributing property rights over environmental resources. These instruments are applied in
order to correct price signals, so that individual optimizing decisions are aligned with the
socially optimum resources allocation. This frame of analysis is the major contribution of
economic theory to the field of environmental policies. In the solutions neoclassical
economics provides for the internalization of environmental externalities the key issue is
determining the social optimum. In order to determine the social optimum, it is necessary to
set some optimum level of pollution, since a level of zero pollution is considered unrealistic.
This optimum level of pollution is set according to a comparison between the costs and
benefits of pollution and de-pollution. The problem is represented as a problem of allocation
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 of scarce resources. To summarize, pollution causes damage but de-pollution implies costs.
Resources are scarce, so those resources to be invested in the protection or restoration of the
environment cannot be used for the production of other socially valuable goods. The
internalization of environmental negative externalities results in solving a problem of
costbenefit analysis applied to pollution and de-pollution. This approach oversimplifies the
nature of environmental problems and raises a great many critiques. First of all, the
redistributive effects of environmental policies designed according to this model are not
taken into account. The unequal allotting of costs and benefits among different individuals,
social categories, present and future generations, geographical areas is not considered in the
decision process. Important issues of equity linked to the environment go completely
unaddressed in this frame.

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

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

The claim here is that given the existence of competing objectives in environmental
policies, resolution requires some common measure of comparison. For example, when
managing a forest, conflicts can arise between objectives of biodiversity preservation, of
wood production, of recognition of cultural values attached to the forest. In the neoclassical
approach the way to solve the conflict is through comparing costs and benefits of different
forest management measures. This implies putting a price not only on biodiversity but also
on people’s attachment to forests as part of their identity. This implies not considering that
in real life not all objectives are tradeable and that social relations exist (including relations
to the environment) that are constituted by refusing to put a price on them

4. Fourth,

Discuss how resource characteristics and resource scarcity influence the

market allocation of natural resources

What is resource scarcity?

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

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

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

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

resource scarcity Before proceeding it is important to briefly discuss the complexity of the
independent variable, resource scarcity. It can refer to at least three very different situations
—and many variations of these. The first, the minimalist account, concerns the availability
of natural resources needed to DIAGRAM A DIAGRAM B DIAGRAM C Richard A.
Matthew 7 satisfy basic human needs for food, shelter, and energy. In his widely cited 2004
study, Jared Diamond discusses the case of Easter Island as a quintessential example of the
unsustainable use of natural resources leading to scarcity at the level of basic human needs
leading to social violence and disintegration. The island’s forest cover—its principal source
of food, shelter and energy—was completely decimated as trees were cut down at
unsustainable rates, apparently to be used as rollers to move vast statues. A second version
of scarcity, the moderate account, concerns the availability of resources to satisfy
consumption at current or higher levels, which is to say consumption based on real and
projected demand, rather than a minimalist account of human needs. Mathis Wackernagel
(et al. 2002) is associated with the concepts of “ecological footprint” and “ecological
overshoot.” Wackernagel’s research compares actual human use of resources to the planet’s
bio-productivity and shows that around 1980 humankind begins to overshoot the planet’s
regenerative capacity. The trend has continued since that time. A third version of resource
scarcity, the maximalist account, also considered by Wackernagel, defines scarcity in terms
of the actual demand of both human and non-human species. Wackernagel’s team calculates
the resource demand of non-human species as equaling 12 percent of the planet’s bio-
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productivity, which means that human overshoot of the world’s resource base occurred in
the early 1970s. In principle, there is no reason to limit discussion to one account of
scarcity, but it is important to point out that how scarcity is understood and measured is
likely to affect analyses and policy recommendations. In public debate there is always a risk
that arguments will be met with counterarguments that are rooted in different assumptions,
leading to much confusion. In any case, however one defines resource scarcity there is a
compelling body of evidence that argues that having a satisfactory supply of natural
resources is a growing problem for much of humankind. For example, UNEP’s third Global
Environmental Outlook report (2002) contends that both Europe and North America have
seen gains in environmental health due to successful pollution abatement programs, but, like
much of the rest of the world, they have made little progress on sustainable resource
management. Their ecological footprints are several times the world average, which is to
say to maintain their current rates of consumption they must import or extract foreign
resources at unsustainable rates. This is part of why the environmental trends everywhere
else in the world are, according to UNEP, negative. The Global Environmental Outlook
report concludes by identifying four growing divisions in the world: • The Environmental
divide • The Policy divide • The Vulnerability divide • The Lifestyle divide The most
straightforward interpretation of this is that the wealthy and militarily powerful industrial
states of the north have strong pollution abatement programs that are improving their air and
water quality. They are faring less well as resource managers, but they are able to overshoot
their indigenous resource endowments through technological innovation and trade, which
maintains their sumptuous lifestyles but contributes to the vulnerability of the peoples of the
south. To this one might add that the negative social effects of unsustainable extraction rates
are being held in check through displacement onto the weak and projection onto the unborn.
If one accepts that (a) many people around the world have inadequate local access to the
natural resources—such as forest products, fresh water, food, and energy—needed to
maintain their current lifestyles or meet their basic needs, but (b) the social effects of
generalized scarcity are being masked through displacement onto the poor and projection
into the future, then it makes sense to consider what an unmasking might reveal. My
thoughts in this regard are organized around three subjects: globalization, climate change,
and ecological services.

Resource scarcity

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

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

5. Fifth,
explain the situation of the resource you identified in terms of sink and
source limits

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

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

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

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

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

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

Natural resource and environmental economics :-Forest Resources are depleted when it is
being used faster than it can replenish itself. The industrial revolution is when it all began.
As our culture advanced and our species invented many things that will make our lives
easier, our demand for raw materials increased by leaps and bounds. We get these resources
from the other. The problem is, we’re using too much and without care. Our planet just can’t
keep up with our ever increasing demands.

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

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

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

Market failure is the economic situation defined by an inefficient distribution of goods and
services in the free market. In market failure, the individual incentives for rational behaviour
do not lead to rational outcomes for the group.

Causes of Market Failure

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

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

harms a third party. Pollution resulting from the production of certain goods is an example of a
negative externality that can hurt individuals and communities. The collateral damage caused
by negative externalities may lead to market failure.
 Information failure: When there is insufficient information available to certain participants in
the market, this can also be the source of market failure. If the buyer or seller in a transaction
lacks access to the information on which the price is based, they may be willing to overpay or
undercharge for a good or service, disrupting the market's equilibrium.
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 Market control: When one party has too much control over a market, this can also create
imbalanced pricing and lead to market failure. In the case of a monopoly or oligopoly, a single
seller or a small group of sellers can manipulate pricing. In other situations, known
as monopsony or oligopsony, it is the buyers that have the advantage. In either case, the
disrupted balance of supply and demand could cause market failure.
 Public goods: Public goods are another example of market failure because they defy the tenets
of supply and demand that drive the free markets. Public goods and services are nonexcludable
—once something like a street light is produced, it is accessible to everyone, and the producer
cannot limit consumption only to paying customers. Public goods are also nonrival, as use by
one individual does not limit consumption by others. Given these characteristics, the private
sector has little incentive to produce public goods, which leads to market failure, and the
government usually has to provide these goods or subsidize their production.

Solutions to Market Failure

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

 Private market solutions: In some instances, the solution to a market failure may emerge
within the private market itself. For example, asymmetrical information could be solved by
intermediaries or rating agencies such as Moody's and Standard & Poor's informing market
participants about securities risk. Underwriters Laboratories LLC performs the same task for
electronics. Negative externalities such as pollution may be solved with tort lawsuits that
increase opportunity costs for the polluter. Radio broadcasts elegantly solved the non-
excludable problem by packaging periodic paid advertisements with the free broadcast.
 Government-imposed solutions: When the solution does not come from the market itself,
governments can enact legislation and take other measures as a response to a market failure.
For example, if businesses hire too few low-skilled workers after a minimum wage increase,
the government can create exceptions for less-skilled workers. Governments can also impose
taxes and subsidies as possible solutions. Subsidies can help encourage behavior that can
result in positive externalities. Meanwhile, taxation can help cut down negative behavior. For

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

Climate change as a market failure

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

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

An example is the gas pollution emitted from industrial processes. The individual consumer or
producers don’t feel the cost of this pollution but society does. Thus, we say market failure
occurs when free-market processes affect societal welfare.

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

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

7. Seventh, Environmental Policy

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

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

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

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

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

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

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