Fundamentals of the Economics of Environmental Resources

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Fundamentals of the Economics of Environmental
Resources

• The Optimal Trade-off between Environmental
  Quality and Economic Goods

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Waste Assimilative Capacity three key factors

• First, like anything else in nature, the waste
  assimilative capacity of the environment is
  limited. Thus, the natural environment cannot be
  viewed as a bottomless sink. With respect to its
  capacity to degrade waste the natural environment
  is, indeed, a scarce resource.

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• Second, the assimilative capacity of the natural
  environment depends on the flexibility of the
  ecosystem and the nature of the waste.
• Degradable pollutants (municipal waste)
• persistent or stock pollutants (toxic waste)

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• Third, the rate at which the waste is discharged
  greatly affects the ability of the environment to
  degrade residuals. The implication of this is
  that pollution has a cumulative ecological
  effect--i.e. pollution reduces the capacity of
  an environmental medium to withstand further
  pollution.

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Lessons from the Simple ModelWf(X,t)

• The natural environment has a limited capacity to
  degrade waste.
• A certain minimum amount of economic goods can be
  produced without causing damage to the natural
  environment. Thus, zero pollution not only is a
  physical impossibility, but even on purely
  ecological considerations, it is an unnecessary
  goal to pursue.

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• Although the above simple model does not
  adequately capture this, the cumulative effect of
  waste discharge into the natural environment is
  nonlinear. This is because pollution tends to
  reduce the capacity of an environment to
  withstand further pollution.

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• The ecological threshold of economic activity (Xo
  in Figure 5.1) can be augmented by technological
  means.

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Conditions for Clearly Defined Ownership Right

• First, the ownership rights of the resource are
  completely specified.
• Second, the rights are completely exclusive so
  that all benefits and costs resulting from an
  action accrue directly to the individual
  empowered to take actions.

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• Third, the ownership rights of the resource are
  transferable. In other words, resources can be
  exchanged or simply donated at the will of the
  owners.
• Finally, ownership is enforceable. That is the
  ownership of resources is legally protected.

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Implications of Commonly Owned Resources

• First, for the commons, economic pursuit on the
  basis of individual self-interest would not lead
  to what is best for society as a whole. In other
  words, the principle of Adam Smiths invisible
  hand would be violated.

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• Second, if tragedy is to be averted, the use of
  commons needs to be regulated by a visible hand.

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Environmental Externalities and Their Economic
Consequences

• Externality is defined as conditions arising when
  the actions of some individuals have direct
  (negative or positive) effects on the welfare or
  utility of other individuals, none of whom have
  direct control over the activity.
• Examples The avid gardner and the fish hatchery
  cases.

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• The Root Causes of Environmental Externalities
• Lack of exclusivity (non-exclusiveness) for the
  following reasons
• the good is non-rival
• the transaction cost is high
• the resource is commonly owned

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• The economic consequences of Externality
• In the presence of real externalities, there will
  be a divergence between private and social
  evaluations of costs and benefits.
• This would cause what economist recognize as
  market failure.

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Final Lesson

• In the presence of an externality, resource
  allocation through the guidance of a free-market
  system would lead to inefficiency. More
  specifically, because the market lacks a
  mechanism by which to account for external costs,
  it tends to favor more production of goods and
  services from industries inflicting damage to the
  natural environment. Thus, the presence of real
  externality creates a misallocation of societal
  resources.