Economics Of Environmental Sustainability


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Economics Of Environmental Sustainability

  1. 1. ECONOMICS OF ENVIRONMENTAL SUSTAINABILITY A BASIC CONCEPT By Masood Haider Zaidi University of Engineering and Technology Lahore, Pakistan
  2. 2. ECONOMICS OF ENVIRONMENTAL SUSTAINABILITY A BASIC CONCEPT <ul><li>Economics Defined: </li></ul><ul><li>Economics is the study of, how people make their living, how they acquire their food, shelter, clothing, and other material necessities and comfort of this world. It is a study of the problems they encounter and of the ways in which these problems can be reduced. </li></ul>
  3. 3. Economy Environment Linkage <ul><li>Production and consumption takes place in a given environment. </li></ul><ul><li>Environment provides for scarce resources, accepts residuals resulting from human activities and also provide amenity. </li></ul>
  4. 4. Production Consumption A S R Amenity services Resource flows Residuals flows Goods and services Labour Economy Environment Linkages Economy Environment
  5. 5. The Environmental Sustainability <ul><li>The ability of the environment to meet the needs of the present without compromising for the needs of the future generations. </li></ul><ul><li>The concept of sustainable environment is closely linked with the concept of sustainability of growth and development. </li></ul>
  6. 6. Vision of the future <ul><li>The Premise: Societies germinate the seed of their own destruction. </li></ul><ul><li>Thomas Malthus foresaw a population growth outstripping growth of food supply resulting in starvation and death. </li></ul><ul><li>During 1970’s and 1980’s modern ecologists suggested that environment possesses a unique carrying capacity to support humans and once that capacity is exceeded, widespread ecological disruption occurs with disastrous consequences for humanity. Here the focus is not on individual societies but on the survival of the planet . </li></ul>
  7. 7. Sources of Concern <ul><li>1. Since 1950’s the world has lost 1/5th of the top soil from its cropland; a fifth of its rain forests and tens of thousands of plants and animal species. </li></ul><ul><li>2. Human activity has increased carbon dioxide levels to the point where the global climate is being adversely affected.(Greenhouse Effect) </li></ul><ul><li>3. Protective ozone layer is being depleted. </li></ul><ul><li>4. Dead forests and lakes are common sights now. </li></ul><ul><li>5. UN Population Division estimates that the world’s population will exceed 10 billion by year 2050. </li></ul>
  8. 8. Rebirth of Environmentalism <ul><li>1960’s witnessed the rebirth of environmentalism. </li></ul><ul><li>4 BASIC WORLD VIEWS ON ENVIRONMENTALISM </li></ul><ul><li>1. Exploitative Technocentarism : Market Mechanism in conjunction with technological innovations will ensure infinite substitution possibilities to mitigate long term resource scarce city. </li></ul><ul><li>2. Accommodating Technocentarism : Rejects the notion of infinite substitution and instea4d support a sustainable growth policy guided by resource management rules. </li></ul>
  9. 9. Rebirth of Environmentalism <ul><li>3. Preservationist ecocentrism : </li></ul><ul><li>Emphasizes the need for prior macroenvironmental constraints on economic growth and favors a decentralized socio-economic system. </li></ul><ul><li>4. Extreme preservationist ecocentrism: </li></ul><ul><li>This view is dominated by the intuitive acceptance of the notion of intrinsic (as opposed to instrumental) value in nature and rights for non-human species. </li></ul><ul><li>UN Environmental Program was established in 1972 recognizing the need to protect the environment from depletion and degradation. </li></ul>
  10. 10. Environmental Values and Sustainability <ul><li>In economics value is expressed via individual consumer preferences and/or opportunity costs. </li></ul><ul><li>In resource allocation, a differentiation between held values (which are basis for preferences) and assigned values (which are results of preferences) can be made. </li></ul><ul><li>Three basic environmental value relationships seem to underline the policy and ethics adopted in society: values expressed via individual preferences; public preference value and functional physical ecosystem value. </li></ul>
  11. 11. Economics of the Environment <ul><li>The Human-Environment Relationship </li></ul><ul><li>Considering Environment as an asset: </li></ul><ul><li>The relationship between environment and the ecosystem is a closed system, i.e. it assumes the first law of thermodynamics.” Energy and matter cannot be created or destroyed”. </li></ul><ul><li>Excessive waste can depreciate the services which environment provides. </li></ul><ul><li>People and Environment: </li></ul><ul><li>2nd Law of Thermodynamics: “ No conversion from one form of energy is completely efficient and that the consumption of energy is an irreversible process. </li></ul>
  12. 12. Valuation of the Asset <ul><li>The normative approach attempts to maximize the value of the environmental asset by creating a balance between preservation and the use of that asset. </li></ul><ul><li>Maximization of net benefit from the use of resource : </li></ul><ul><li>Net benefits are maximized at MB = MC. </li></ul><ul><li> Price MC </li></ul><ul><li>B </li></ul><ul><li> C </li></ul><ul><li>5 F E </li></ul><ul><li>A </li></ul><ul><li>Q </li></ul><ul><li>0 G 5 D </li></ul>At Q=5 Total Benefit = OBE5 and Total Cost = OAE5 Net Total Benefits = ABE which is maximum.
  13. 13. Dynamic Efficiency: Taking Time as a factor . <ul><li>Logic: </li></ul><ul><li>Exhaustible resources once used are gone for ever. </li></ul><ul><li>Renewable resources may be over-harvested. </li></ul><ul><li>Persistent pollutants can accumulate over time and damadge unused environmental resources. </li></ul><ul><li>Making Choice when costs and benefits occur at different times. </li></ul><ul><li>Dynamic efficiency proposes maximization of PV of net benefits. </li></ul><ul><li>Assume MC to be constant at Rs. 2. and demand function be P=8-0.4q. </li></ul><ul><li>It is a two period model with total supply of resource to be 30 units for the two periods. </li></ul>
  14. 14. <ul><li>Price Price </li></ul><ul><li>8 8 </li></ul><ul><li>2 MC 2 MC </li></ul><ul><li>0 15 MB Q 0 15 MB Q </li></ul><ul><li>If the total supply is 30 units for two periods then we will produce 15 in each period regardless of discount rate. Hence static criterion is sufficient to maximize the net benefits. </li></ul>
  15. 15. Dynamic Efficiency: PV of net benefits is maximum <ul><li>Price Price </li></ul><ul><li>8 8 </li></ul><ul><li>2 MC 2 MC </li></ul><ul><li>0 15 MB Q 0 5 15 MB Q </li></ul><ul><li>If the total supply is less than 30, say 20 units for two periods then how can we determine the efficient allocation. Suppose we produce 15 in period one ans 5 in period 2. </li></ul><ul><li>PV(benefits) of 1st period = Rs. 45 and PV(benefits) of 2nd period with 5 units produced = Rs. 25/(1+r) i.e. Rs 22.73. Is this maximum? </li></ul>
  16. 16. Dynamic efficient allocation <ul><li>Dynamic Efficient Allocation has to satisfy the condition that the PV of the MNB (marginal net benefits) from the last unit in period 1 equals the MNB from the last unit in period 2. </li></ul><ul><li>MNB MNB </li></ul><ul><li>Period 1 PV of MNB PV of MNB Period 2 </li></ul><ul><li>(Rs) 6 (Rs) 5.45 </li></ul><ul><li> E </li></ul><ul><li> 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 </li></ul><ul><li> 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 </li></ul><ul><li>Scarcity and Efficient allocation: </li></ul><ul><li>Sustainability and Efficient allocation </li></ul>
  17. 17. The Quest for Sustainable Development <ul><li>Delegations from 178 countries met in Rio de Janeiro in 1972 to begin the process of charting a sustainable development course for the future global economy. </li></ul><ul><li>Sustainable Development is development that meets the needs of the present without compromising the ability of the future generations to meet their own needs . </li></ul>
  18. 18. Sustainability of Growth <ul><li>Per </li></ul><ul><li>Capita D </li></ul><ul><li>Welfare </li></ul><ul><li>C </li></ul><ul><li> B </li></ul><ul><li>t  Time t  t  A </li></ul>
  19. 19. Production Consumption Amenity Sink R esource Amenity services Residuals flows Goods and services Labour The Economy in the Environment CAPITAL STOCK RECYCLING ENERGY
  20. 20. Thanks