Chapter 20

Chapter 20

SustainableDevelopment

Norton Media Library

Dwight H. PerkinsSteven Radelet

David L. Lindauer

Chapter 20 Learning Objectives

• The problems caused by open access to common resources. • How external diseconomies distort market outcomes. • The concept of resource rent. • The implications of the rule for optimizing the harvest of a

renewable resource and the rule for optimal depletion of a nonrenewable resource.

• How secure, long-term, transferable property rights can reduce the market failures that cause overexploitation of natural resources.

• The information requirements for regulating externalities efficiently.

• How taxes or marketable permits (rights to pollute) can internalize external costs and lead to an efficient market outcome for natural resources.

Chapter 20: Learning Objectives

• efficient market outcome for natural resources. • How government interventions and policy failures have

contributed to the wasteful use of resources. • How national accounts can be adjusted to incorporate the

depletion of natural capital. • The neoclassical analysis of how markets respond to scarcity,

and its implications for global sustainability of development. • Why widespread poverty is a threat to the global environment,

and economic development is part of the solution. • How rich nations and poor nations differ with regard to global

resource management, so room exists for a bargain that can benefit all nations.

Chapter 20: Outline

• 1.Market Failures – The Commons – Externalities: A Closer Look – Sustainable Harvests – The Value of Time

• 2.Policy Solutions – Property Rights – Government Regulation – Taxation – Marketable Permits

Chapter 20: Outline

• 3.Policy Failures • 4.Measuring Sustainability

– Natural Capital Sustainability – Resources and National Income

• 5.Global Sustainability – Malthusian Views – Neoclassical Views – Environmental Standards, Global Competitiveness,&

Trade – Poverty and the Environment – Rich Nations and Poor Nations

Market Failures

• 1.Market Failures • Environmental degradation often is a result of market

failure where market prices deviate from scarcity values and individuals and companies maximize their profit but cause losses or damage to other parties & society– The Commons : involves open access, free of charge

to any member of the village or community: If we cansider Environment as a common resource, then private activity may generate external costs leading to market failure

Externalities

• Externalities are the core of common resource problem. External costs or diseconomies arise when a polluting firm impse costs on others. Because the firm does not bear these costs, the PMC is lower so more of the polluting product is produced and consumed, See figure 20.1

Sustainable Harvests

• Most common property resources are renewable resources that can regenerate given time

• The difference between rate the rate of harvest and the rate of growth is the rate of depletion.

• The question is what is the maximum harvest time.

Optimal Exploitation of the Fisheries

• Private profit maximizing solution will maximize net revenue (profit) at E*

• Common Property solution will lead to solution E1 or extension

• Common property resources are over used

Discoutn Value of Forest Harvest Options

• The timber company has 3 choices• It can cut the three now for for immedicate profit

and use proceeds in another business-Option A. It can wait for a future benefits from growth of trees and cut or harvest or option B discounting the present value of future net revenue

• Option C is a continuous harvest made possible by rapid growth of tree and price rises but less so by high discount rate.

Policy Solutions

• Market failure leads to over use of natural resources stem from external costs that are not born by producers. These require government interventions in the following ways

• Property Rights• Government Regulation• Taxation• Marketable Permits

Property Rights

• Assigning Property rights to an individual or a company. As an owner he may produce a socially optimal outcome in a competitive market.

• Characteristics effective property rights• Long term and secured, transferable,

enforceable. Longivity converts asset that the producer can invest on in the long run

Property rights can be shared by community or a group

• Example: The Nile Basin Initiative • The Nile is 7000KM long and the basin covers 3

million square KM and shared by 10 countries: Burundi,Congo, Egypt, Ethiopia, Eritrea, Kenya, Rwanda, Sudan, Tanzania and Uganda

• About 150 million live on the Nile. Together they established the Nile Basin Initiative (NBI): Potential for Cooperation & Conflict

• See box 20.1

End Chapter 20

This concludes the Norton Media LibrarySlide Set for Chapter 20

W. W. Norton & CompanyIndependent and Employee-Owned

Economics ofDevelopment

SIXTH EDITION

ByDwight H. Perkins

Steven RadeletDavid L. Lindauer