University of Puthisastra

Economics Development Class

Lecture 10: Environment and
Development

Professor: Hong Muyheng

January 10, 2017

(Week 10)
 Group Presentation
• Choose one of the topic here, then make a short slide
presentation next week. Find about government’s vision,
policies, regulations, statistic, achievement and so forth in
each country below regarding to the Health and Education
sector.
• This activity provide each of you 5 credits.
1. Cambodia
2. Japan
3. United States
4. Thailand
5. Vietnam etc.
8-2
Week 10

3
 Chapter 10
The Environment and Development
5
Economics and the Environment
• Environmental issues affect, and are affected by,
economic development

• Poverty and ignorance may lead to non-

sustainable use of environmental resources

• The two serious issues we face today are

Environmental (decay) deterioration and global
warming.

10-6
 National Income Accounting
• GDP (or GNI) is the market value of final
goods and services

• GDP (or GNI) excludes the externalities of

production and consumption
– Negative externalities: costs imposed on the
environment and third parties; e.g., air pollution,
land contamination

10-7
Reasons for Environmental Decay
• The common property right over the environment

– No one has private property rights over the

environment being polluted (e.g., air, ocean water)
• The collectively consumed nature of the
environment
– Benefits received by all users
– No one can be excluded from using it

10-8
 Adjustment for Environmental
Decay
• To adjust for the negative externalities find the
“sustainable” Net National Income as
NNI* = GNI – Dm – Dn – R – A where
– Dm = depreciation of physical capital
– Dn = depreciation of environmental capital
– R = expenditures required to restore environmental capital
– A = expenditures required to avert destruction of
environmental capital

10-9
Causes of Environmental Decay
1. Poverty
2. Rapid population growth
3. Rapid urbanization
4. Affluence & excess consumption
5. Industrial production
6. Use of chemical inputs
7. Relaxed environmental laws and weak law
enforcements

10-10
 1. Poverty and Environment
• Poverty and lack of development policies
would force the people to overuse natural
resources:
– Cultivate the land without fertilization
– Cut the trees for fuel
– Contaminate the water
– Pollute the air

10-11
 2. Population Growth and Environment

• Rapid population growth put pressure on

natural resources:

– Clean air
– Arable land
– Safe drinking water
– Forests
– Mineral deposits

10-12
13
 3. Urbanization and Environment

• Rapid urbanization and relaxed environmental

laws result in environmental degradation:
– Air pollution from fossil fuel consumption
– Congestion and noise pollution
– Water contamination
– Relaxed emission control policies

10-14
 4. The Global Environment
• Consumption patterns of the very poor and very rich

• Global warming and rising sea level

• Rapid population growth, poverty, and income
inequality in LDCs
• Rapid deforestation due to pollution and commercial
development
• Rapid desertification due to lack of rural development

10-15
16
17
 5. Environment and Development: The
Basic Issues
• Sustainable development and environmental
accounting
• Population, resources, and the environment
• Poverty and the environment
• Growth versus the environment
• Rural development and the environment

10-18
 6. Private Property Rights
Perfect private property rights require:

• Universality: all resources are privately owned

• Exclusivity: owner prevents others from using
resources
• Transferability: owner can sell resources when
desired
• Enforceability: owner receives all benefits

10-19
 Economics of the Environment
Free market transactions achieve stable
equilibrium, benefiting:
• Consumer through the creation of a consumer
surplus
• Producers through the creation of a producer
surplus

10-20
Economics of the Environment

Price Supply

Consumer Surplus

P Marginal Cost
Producer Surplus or Scarcity Rent

Demand

Q Quantity

10-21
 Optimal Resource Use

Resource conservation results in a

• Higher future price

• Greater producer surplus

10-22
Optimal Resource Use

Price
By reducing consumption from 75 to 50, price goes
up to PS and producer surplus increases by PSPab

Ps a

P MC
b

Demand

50 75 Quantity

10-23
 Common Property Rights
• When a scarce resource (e.g., land) is
publicly owned and thus freely available to
all users (e.g., farming or grazing animals)

• Any potential benefit (i.e., producer surplus

or scarcity rent) will be competed away as
more people use the resource

10-24
 Common Property Rights

Return to labor Initial employment is L*, where MPL = W and PS = AP*CDW.

As more workers use the land, MPL < W and PS declines.

At LC, MPL is very small, AP = W, and PS = 0

AP* C

W D E Wage
Marginal Product of Labor
Average Product of Labor

L* Lc No. of Workers

10-25
 Public Goods and Environment
Public or collectively consumed good:
• Provides benefits to all users
• Its availability won’t diminish as others use it simultaneously
• Is produced by the government
• Is subject to the “free-rider” problem

The human environment is collectively consumed.

Hence, it is subject to decay.

10-26
 Demand for Public Goods
• Aggregate demand is the “vertical” summation
of individual user demands

• Cost of providing the good to the society is

greater than the individual users’ costs

10-27
Demand for Public Goods

A+B
Price
Q* = Qa + Qb; Pa < Pm; Pb < Pm
B

A Aggregate Demand

c MC
Pm b
Pb Aggregate Supply

Pa a

Qa Qb Q* Quantity

10-28
 Negative Externalities
• When consumption or production inflicts
damages on third parties (e.g., air pollution
generated by using private automobiles)

• The good whose production pollutes the

environment is over-produced, but under-
priced if producers do not pay for the cleaning
cost

10-29
 Negative Externalities

Price MCS
MCP
a Supply
P*
PM b Dead-Weight Loss = abc
PC
c

Demand
Q* QM Quantity

MCS>MCP: QM > Q* and PM < P* where Q* and P* = “socially optimum”

price and quantity; QM and PM = “market” price and quantity
10-30
 Environmental Decay
• As the demand for the good increases due to
– Economic growth
– Population growth

• The “market” price and quantity will further

diverge from the “socially optimum” price and
quantity

10-31
 Environmental Decay

Price MCS
MCP
P2

P*

P1
D2
D1
Quantity
Q1 QM
Q*
10-32
 Environmental Policies, LDCs
LDCs must improve the environment:
• Proper resource pricing to include externalities:
impose pollution taxes and standards

• Community involvement: education, recycling

• Private property rights and resource ownership

10-33
 Environmental Policies, LDCs
LDCs must improve the environment:
• Programs to improve alternatives to the poor

• Improve the economic status of women

• Establish industrial emission abetment policies

10-34
 Environmental Policies
MDCs must help LDCs improve the environment:

• Trade policies, reducing trade barriers

• Debt relief to reduce the financial burden

• Development assistance to improve the

environment

10-35
 Environmental Policies
MDCs must help improve the global environment:
• Emission control

• Research and development

• Import restrictions

10-36
 Q & A session!

THANKS YOU!
សូមអរគុណ!

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