 What Is Economic Development?

 What Is Natural Resource?

 What Are The Role of Natural Resources in Economic
Development?
 Relationship between Economic Growth and
Environmental Degradation.
 Population And Environmental Linkages.
 Environment As A Necessary and Luxury.
 It refers to the process of improvement in the economic well-
being and quality of life of a nation, region, or community. It
involves sustained, long-term growth in various economic
indicators and factors that contribute to overall prosperity.
 It Includes increasing income, reducing poverty, improving
infrastructure, enhancing education and healthcare, fostering
innovation, Employment Generation, Reducing Income
Inequality, Sustainable Development, Trade and Investment,
Innovation and Research
 Balancing economic growth with social and environmental
considerations is key to achieving sustainable and inclusive
development.
 Economic development in India has been a dynamic and evolving process over the
years. Since gaining independence in 1947, India has made significant strides in
various aspects of its economy, society, and overall well-being.
 GDP Growth:
 Economic Liberalization and Reforms: -
 Infrastructure Development:
 Social Indicators:
 Sustainable Development Goals (SDGs): India is committed to achieving the
United Nations' SDGs, focusing on goals related to poverty eradication, education,
gender equality, clean energy, and environmental protection.
 Job Creation: With a growing population, job creation is a significant challenge.
 Challenges: India faces challenges such as environmental degradation, air
pollution, water scarcity, infrastructure deficits, and bureaucratic hurdles that can
impact economic growth and development.
  Natural resources are the components found in the natural environment that are essential for
human survival, well-being, and economic activities.
 Natural resources play a crucial role in supporting human life, economic development, and
environmental stability.
1. Renewable Resources:
o Water, Air, Land, Climate and Weather,

2. Non-Renewable Resources:
o Fossil Fuels: These include coal, oil, and natural gas, which are used for energy
production and industrial processes.
o Minerals and Metals:
 Natural Resources are the raw materials and inputs that are used in various economic
activities, such as agriculture, manufacturing, and energy production.
 Input for Production: For example, minerals, metals, and fossil fuels are essential for
manufacturing and energy production. Agricultural resources like land, water, and fertile soil
are vital for food production.
 Export and Trade: The export of commodities like oil, minerals, Coal and agricultural
products can drive economic diversification and expansion.
 Employment and Income Generation: Industries that rely on natural resources create jobs
for the local population. This leads to increased income and improved living standards for
people living in resource-rich regions.
 Revenue Generation: through taxing the extraction, production, and sale of natural
resources.
 Investment and Infrastructure: Natural resources attract investment, both domestic and
foreign, to develop the necessary infrastructure for their extraction, transportation, and
processing.
 Technology and Innovation: The need to maximize oil extraction has led to the
development of advanced drilling techniques.
 Tourism: - India's natural beauty, including its diverse landscapes,
historical sites, and wildlife, attracts tourists from around the world.
 Forestry and Biodiversity: India's diverse flora and fauna contribute to its
forestry and biodiversity resources. These resources play a crucial role in
maintaining ecological balance, providing timber, medicinal plants, and
other non-timber forest products, and supporting tourism.
 Renewable Energy: As India works toward sustainable development, its
investments in renewable energy resources like solar and wind power have
the potential to transform its energy landscape and reduce dependency on
fossil fuels.
 Despite the benefits, there are challenges related to natural resource
management. Overexploitation, environmental degradation, and inadequate
regulations can lead to negative impacts on ecosystems and communities.
Sustainable resource management is crucial to ensure that the benefits of
natural resources are harnessed for long-term economic growth without
compromising environmental and social well-being.
 Example: - Greta Thunberg, (Fridays for Future)
 While economic growth can bring about increased prosperity and improved living standards, it can
also lead to negative environmental impacts.
 This relationship is often referred to as the "environmental Kuznets curve," which suggests that
environmental degradation tends to worsen during the early stages of industrialization and economic
growth, but then starts to improve as economies reach higher levels of development.
 Pollution and Emissions: Rapid industrialization and economic growth can lead to higher levels of
pollution, including air and water pollution, as well as increased greenhouse gas emissions that
contribute to climate change.
 Resource Depletion: As economies grow, the demand for natural resources increases.
Unsustainable extraction of resources can lead to depletion, habitat destruction, and loss of
biodiversity.
 Urbanization and Land Use Change: Urbanization, driven by economic growth, can result in
land use changes and habitat destruction. It is also challenging to manage solid waste, which leads
to environmental and health hazards.
 Water Scarcity: Economic growth can lead to increased demand for water resources, potentially
leading to water scarcity.
 Global Perspective: Global environmental challenges such as climate change and biodiversity loss
require international cooperation and efforts to address effectively.
 Technological Advancements: Economic growth can also drive technological advancements and
innovations that can help mitigate environmental degradation.
 Regulations and Policy: As economies mature and societies become more aware of environmental
issues, governments often enact stricter regulations and policies to address environmental
degradation. Example- Forest Right Act 2005:- Area under forest cover increased from 19.3% in
2000 to 24.6% in 2019 (India State of Forest Report 2019). National Action Plan on Climate
Change and the Swachh Bharat Abhiyan (Clean India Mission)
 Green Growth: The concept of "green growth" focuses on decoupling economic growth from
environmental degradation. It emphasizes using environmentally friendly technologies and
practices to achieve economic growth without harming the environment.
 The relationship between economic growth and environmental degradation is complex and
multifaceted.
 While economic growth can drive environmental degradation, it also offers opportunities for
addressing environmental challenges through technological innovation, policy interventions, and
sustainable development strategies.
 Balancing the goals of economic progress and environmental preservation is a key challenge for
governments, businesses, and societies around the world.
 India's large size population has significant implications for the environment, natural
resources, and overall sustainability.
 Population Size and Composition: India's population exceeds 1.4 billion people. the huge
population can lead to increased demand for resources, such as land, water, energy, and
food. The changing class and demographic structures have enhanced the demand for land,
water, energy, and food.
 Land Use Changes: Rapid urbanization and population growth lead to increased demand
for housing, infrastructure, and commercial spaces. This often results in deforestation,
habitat destruction, and changes in land use patterns.
 Air and Water Pollution: A larger population contributes to higher levels of pollution from
vehicular emissions, industrial activity, and waste generation. This results in poor air quality
and polluted water bodies.
 Waste Generation: A growing population generates more waste, including solid waste and
electronic waste.
 Climate Change: Population growth, along with increasing consumption, contributes to
greenhouse gas emissions that drive climate change.
 Sustainability and Development: Policies that promote efficient resource use,
renewable energy, waste management, and sustainable agriculture are crucial to
mitigate negative environmental impacts.
 Family Planning and Education: Access to family planning services and
education has been linked to lower birth rates.
 Awareness and Education: Educating the public about responsible resource
consumption and environmental protection can drive positive change.
 Sustainable Urbanization: As urbanization continues, planning for sustainable
cities and efficient urban infrastructure becomes crucial to manage the
environmental impact of a growing population.
 Addressing population size and composition while ensuring sustainable resource
management, environmental protection, and economic development is a complex
challenge that requires the collaboration of government, civil society, businesses,
and individuals.
 The necessity emphasizes the fundamental role of the environment in supporting life,
well-being, and basic human needs.
 Basic Needs: Clean air and water, nutritious food, and suitable living conditions are
essential for maintaining human health and sustaining life.
 Health and Well-being: A healthy environment contributes to physical and mental well-
being.
 Sustainable Resource Use: Recognizing the environment as a necessity underscores the
importance of using natural resources in a sustainable and responsible manner to ensure
their availability for future generations.
 Environmental Justice: This perspective often highlights the unequal distribution of
environmental benefits and burdens among different social and economic groups. Access
to a clean environment is considered a basic human right.
 Natural Disasters: A healthy environment, including well-managed wetlands and forests,
can act as a buffer against such disasters.
 This perspective recognizes that clean air, water, fertile soil, and a stable climate are
essential for human survival and the functioning of ecosystems.
 Environment as a Luxury
Recreation and Leisure: People often seek out natural landscapes and environments for
relaxation, recreation, and enjoyment.
Tourism and Aesthetics: Beautiful natural scenery, biodiversity-rich areas, and unique
ecosystems can attract tourists and contribute to the tourism industry, enhancing economic
activities.
Cultural and Spiritual Value: Some view natural environments as spiritually significant or
culturally meaningful, valuing them for their historical, aesthetic, or traditional significance.
Biodiversity and Ecological Value: Some ecosystems, species, or habitats are considered
valuable due to their rarity or uniqueness, leading to conservation efforts to protect them as a
form of luxury or exclusivity.

Recognizing the environment as a necessity is crucial for addressing pressing issues like
climate change, pollution, and resource depletion that directly impact human well-being and
survival. Simultaneously, understanding the environment's role as a luxury emphasizes the
importance of preserving unique landscapes, biodiversity, and cultural heritage for aesthetic,
recreational, and spiritual reasons.
 Environment has a significant role in the process of Economic Development.
 Unbalance Economic Growth leads to environmental degradation. Need to
maintain a balanced between Economic Growth and Environment. More
focus should be on Green Growth.
 Population Size and Compositional is another major reason for
environmental degradation.
 The country's growing population, rapid urbanization, and industrialization
pose challenges to the environment's basic necessities, such as clean air and
water. However, recognizing the environment as a luxury also underscores
the importance of preserving cultural and natural heritage for future
generations.
What is an Externality?
 An externality is a cost or benefit of an economic activity experienced by an
unrelated third party, or Externalities are third party (spill-over) effects arising
from production and consumption of goods and services for which no appropriate
compensation is paid.
 The external cost or benefit is not reflected in the final cost or benefit of a good
or service. Therefore, economists generally view externalities as a serious
problem that makes markets inefficient, leading to market failures. The
externalities are the main catalysts that lead to the tragedy of the commons.
 The primary cause of externalities is poorly defined property rights. The
ambiguous ownership of certain things may create a situation when some market
agents start to consume or produce more while the part of the cost or benefit is
inherited or received by an unrelated party. Environmental items, including air,
water, and wildlife, are the most common examples of things with poorly defined
property rights.
1. Negative externality
 A negative externality is a negative consequence of an economic activity experienced by an
unrelated third party. The majority of externalities are negative. Some negative externalities, such as
the different kinds of environmental pollution, are especially harmful due to their significant adverse
effects. Negative externalities are divided into production and consumption externalities.

Examples of negative production externalities include:

 Air pollution: A factory burns fossil fuels to produce goods. The people living in the nearby area
and the workers of the factory suffer from the deteriorating air quality.
 Water pollution: a tanker spills oil, destroying the wildlife in the sea and affecting the people living
in coastal areas.
 Noise pollution: People living near a large airport suffer from high noise levels.

Some examples of negative consumption externalities are:

 Passive smoking: Smoking results in negative effects not only on the health of a smoker but on the
health of other people.
 Traffic congestion: The more people that use cars on roads, the heavier the traffic congestion
becomes.
2. Positive externality
 Positive externality is a benefit from an economic activity experienced by an unrelated third party.
Despite the benefits of economic activities that involve positive externalities, the externality also
creates market inefficiencies. Positive externalities can also be distinguished as production and
consumption externalities.
Positive production externalities include:
 Infrastructure development: Building a subway station in a remote neighborhood may benefit real
estate agents who transact properties in the area. Real estate prices would likely increase due to
better accessibility, and the agents would be able to earn higher commissions.
 R&D activities: A company that discovers a new technology as a result of research and
development (R&D) activities creates benefits that help society as a whole.
Examples of positive consumption externalities are:
 Individual education: The increased levels of an individual’s education can also raise economic
productivity and reduce unemployment levels.
 Vaccination: Benefits not only the person vaccinated but other people in the community because
the probability of being infected decreases.
Due to the adverse effect of both negative and positive externalities on market efficiency,
economists and policymakers strive to address the problem. The “internalization” of the
externalities is the process of adopting policies that would limit the effect of the
externalities on unrelated parties. Generally, the internalization is achieved through
government intervention. Possible solutions include the following:

1. Defining Property Rights: A strict definition of property rights can limit the influence of
economic activities on unrelated parties. However, it is not always a viable option since the
ownership of particular things such as air or water cannot be unambiguously assigned to a
particular agent.
2. Taxes: A government may impose taxes on goods or services that create externalities. The
taxes would discourage activities that impose costs on unrelated parties.
3. Subsidies: A government can also provide subsidies to stimulate certain activities. The
subsidies are commonly used to increase the consumption of goods with positive
externalities.
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 behavior do
not lead to rational outcomes for the group.
What is market failure: Market failure - where resources are inefficiently allocated due to
imperfections in the working of the market mechanism i.e. – Externalities – Merit goods /
demerit goods – Information failures – Public goods – Monopolies – Factor immobility –
Inequalities in the distribution of income and wealth.
 When there is a clear economic case for government intervention in markets where some form
of market failure is taking place.
 Externalities cause market failure if the price mechanism does not take account of the social
costs and benefits of production and consumption.
Externalities and Market Failure: The existence of beneficial and detrimental externalities plays
a significant role in determining the activities of production and consumption in the economy.
These externalities act as an obstacle in the achievement of Pareto Optimality due to divergence
between private and social costs and between private and social benefits.
Pareto optimality (also referred to as Pareto efficiency): is a situation where no further
improvements to society's well being can be made through a reallocation of resources that
makes at least one person better off without making someone else worse off.
 Merit goods / demerit goods: Merit goods are goods for which the social
benefits of consumption outweigh private benefits, whereas demerit goods are
goods for which the social costs of consumption outweigh private costs.
Information failures / Asymmetric information: is a term that refers to when
one party in a transaction is in possession of more information than the other.
In certain transactions, sellers can take advantage of buyers because
asymmetric information exists whereby the seller has more knowledge of the
good being sold than the buyer.
Public Good: In economics, a public good refers to a commodity or service that
is made available to all members of society. Typically, these services are
administered by governments and paid for collectively through taxation.
 Examples of public goods include law enforcement, national defense, and the
rule of law. Public goods also refer to more basic goods, such as access to clean
air and drinking water.
 Public goods create market failures if a section of the population that consumes the goods fails to pay
but continues using the good as actual payers. For example, police service is a public good that every
citizen is entitled to enjoy, regardless of whether or not they pay taxes to the government.
 Pure public goods are goods that are non-rivalrous and non-excludable. Non-rivalrous means that one
person's consumption of the good does not reduce the amount available for others, while non-
excludable means that it is difficult or impossible to prevent someone from enjoying the benefits of
the good, even if they do not contribute to its production.
 The existence of pure public goods can cause market failure because they are not efficiently allocated
through the market mechanism of supply and demand. Because public goods are non-excludable,
there is no way for private firms to charge consumers for their use. As a result, private firms may be
unwilling to invest in the production of public goods because they cannot capture the full value of
their investment.
 Furthermore, because public goods are non-rivalrous, consumers may be unwilling to pay the full cost of their
production, as they can free-ride on the consumption of others. This can result in under-provision of public
goods, as private firms may not invest in their production, and consumers may not be willing to pay for them at
a level that would make their provision economically viable. Thus, the existence of pure public goods can cause
market failure by leading to under-provision of goods that are socially desirable but not profitable for private
firms to produce, resulting in a suboptimal allocation of resources.
 https://www.economicsdiscussion.net/pareto-optimality/market-failure-of-pareto-optimality-and-measures-to-correct-it/18969

1. Control of Monopoly Power:

 Monopoly power can be controlled by the government by anti-monopoly laws
and restrictive trade practices legislation. These aim at removing unfair
competition, preventing unfair price discrimination and fixing prices equal to
competitive prices.
 The governments can also being down monopoly price to the competitive level
by price regulation and taxation. It may impose price ceiling so that monopoly
price should be near or equal to competitive price regulating authority of
commission which fixes a pie tor the monopoly product below the monopoly
price.
 Taxation is another way of controlling monopoly power. The tax may believe
Lump sum without any regards to the output of the monopolist. Or it may be
proportional to the output, the amount of tax rising with the increase in output.
In either case, the aim is to bring monopoly price to the competitive level.
Lastly Prof Pisou favoured nationalisation of monopoly to put an end to
monopoly power.
 https://www.economicsdiscussion.net/pareto-optimality/market-failure-of-pareto-optimality-and-measures-to-correct-it/18969

2. Externalities:
 To achieve optimal allocation of resources in the face of externalities, Pigou suggested
social control measures and the use of taxes and subsidies. The state can interfere in all
cases of external diseconomies of production to remove the divergence between private
and social costs and benefits.
 For instance it can ask the factory owner to move out of the residential area by
providing appropriate facilities to the smoke emitting factory. In the case of external
diseconomies of consumption, the state can put an end to noise nuisance by banning the
use of loud speakers except for special occasions during specific hours with prior
permission.
 In the case of negative externalities it should discourage their consumption and
production by leaving taxes. For instance, the state can levy a tax on every family in the
area and pay the sum so collected to the smoke matting factory to move away Thus
taxes and subsidies help to bridge the gap between private and social costs and benefits.
 Another measure commonly suggested is internalisation or unitization of externalities in
production For example firms that are engaged in oil operations in the same filed lead to
inefficient over-drilling and over pumping. With unitization or merger of firms, oil is
produced most efficiently without diseconomies of production.
3. Public Goods:
 Because public goods are non-excludable and non-rivalrous, they are not sold in a
free market like private goods. Therefore, they cannot be provided by private firms.
In this situation, they can be provided by some public authority.
 As the benefits of public goods are indivisible, the state should make people share
the costs of public goods so that everyone is made better off. “One way to pay for a
public good is to charge each person the same proportion of the maximum amount he
or she would be prepared to pay rather than go without the good, while fixing that
proportion so as to cover the total costs of production”.
 In the case of some public goods such as materials for defence, the government can
either itself produce them or it can pay private firms to produce them. So far as the
free rider problem is concerned whereby such services as defence, police, etc. are
provided free to every user, they can be provided by the government out of tax
revenue.
4. Increasing Returns to Scale:
 For the problem of increasing returns to scale (or decreasing costs), opinions
differ concerning government’s role in providing solution to market failure.
Some economists opine that government should nationalise such industries
which operate under decreasing cost and lead to over production.
 Others do not approve of it because they feel that government control would
make conditions worse. Still others suggest that private firms should produce
goods and government should enforce price regulation and tax them so that
social and private costs and benefits are equalised.
5. Indivisibilities:
 The solution to the problem of indivisibility in the case of goods and services
used jointly by more than one person such as street lighting or road, the local
body such as Municipal Corporation should either spend on its repairs and
maintenance or tax the residents or users of the road or street lighting.
6. Property Rights and the Coase Theorem:
 Common property rights lead to externalities. Property rights relate to “who owns property, to what uses it can
be put, the rights people have over it and how it may be transferred.” One solution is to extend property rights
so completely that everyone has the right to prevent people from imposing any costs on them.
 This can be done in the case of public property like parks, libraries, etc. The second solution is to distribute the
property of the rich to the poor. But it is more a question of altering property rights rather than extending the
ownership rights. But such a solution will be impractical.
 The third solution is for the government to charge the damages and compensate for the damages. But it
involves the problem of compensating those who acquired property at a lower cost because of the damage. The
fourth solution is to file a legal suit for monetary damages by the party that has been harmed by the externality
(say smoke).
 Another solution has been suggested by Prof. Ronald Coase (who received the Nobel Prizein Economics in
1991). According to him, market failure due to property rights can be eliminated through private bargaining
among the affected parties.
 He points out that if property rights are clearly defined and marketable and transaction costs are zero, a
perfectly competitive economy will allocate resources optimally, even under externalities.
 This is called the Coase Theorem. By transactions costs he means costs of negotiating or enforcing a contract.
According to Coase, if it is possible to carry out such negotiations at little or no cost, the parties responsible for
an external benefit or cost can negotiate with the parties affected by an externality.
 The sufferer from an externality should levy a charge or offer a bribeto the party which is getting the
maximum benefit from the common property. Thus in the absence of transaction costs, the externality will be
internalised and the socially optimal level of output will be achieved.
7. Aymmetric or Incomplete Information:
 Market failure can be eliminated when rules are framed by regulating authorities by requiring
producers to describe correctly about their products and prices. This will provide people with correct
and relevant information about products.
 Market failure can also be corrected if produces produce high quality standard products and offer
guarantees and warranties to buyers. This requires widespread publicity on the part of sellers so as to
provide correct information to consumers.
 In case where ignorance is the reason for incomplete information, the direct provision of information
by the government may help to correct market failure. For example, employment exchanges provide
information on jobs to those looking for work and ask firms to get in touch with them for the supply
of suitable labour.
 This will help the labour market to work efficiently. Similarly, government providing statistics on
prices, costs, employment, sales trends, exports, imports, etc. help firms to plan their production
with greater certainty. Some private organisations can also help in providing useful data on them.

8. Missing Markets:
 To correct market failure in the case of missing or incomplete markets where two goods are jointly
produced two Nobel laureates K. Arrow and G. Debreu suggest a separate market for each in which
each good and service can be traded to the point where the social and private marginal benefit equals
the social and private marginal cost. This condition will lead to optimal allocation of resources.