Transcript Chapter 1

Economics of Natural Resources
Introduction
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Although this is an “Economics of Natural Resources” course,
one cannot isolate the importance of environmental
importance in such issue
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Terminology
Pollution: Special case of habitat destruction
Chemical destruction rather than physical:
1. Air Pollution
2. Water Pollution
3. Solid Waste Pollution
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Industrial Air Pollution:
release of particles into the earth’s
atmosphere... caused by burning fuels for energy
Release of noxious gases.... caused by chemical reactions
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Industrial Water Pollution:
Contamination of water by
foreign matter
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Solid Waste Pollution:
landfills
incineration
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Economic Development and the
Environment
trade off?
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Vision of the Future
CH. 1
Q: What would cause the demise of a grand and powerful
societies?
Thomas Malthus (1798): observed that sooner or later population
gets checked by famine disease.
Population growth would exceed land’s potential to supply
sufficient food: starvation and death.
In his view, the adjustment mechanism would involve rising death rates
caused by environmental constraints, rather than a recognition of
impending scarcity followed either by innovation or self-restraint.
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Example 1.1: 1. Mayan civilization
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the population growth began to bump into environmental
constraints, specifically the agricultural carrying capacity of
the land.
The growing population depended heavily on a single, locally
grown crop—maize—for food.
The carrying capacity of the most productive local lands was
exceeded, and farmers began to depend upon more fragile
parts of the ecosystem.
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The economic result was diminishing returns to agricultural
labor and the production of food failed to keep pace with the
increasing population.
When the population was reaching its historic peck,
widespread deforestation and soil erosion had set in, thereby
intensifying the declining productivity problems associated
with moving onto marginal lands.
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The royal dynasty, an important source of leadership in this
society, collapsed!
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2. Easter Island
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A rising population, coupled with a heavy reliance on wood for
housing, canoe building, and statue transportation, decimated
the forest
The loss of the forest contributed to soil erosion, declining soil
productivity, and, ultimately, diminished food production.
How did the community react to the impending scarcity? The
social response was war, and ultimately, cannibalism!
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Sometimes societal reactions not only fail to solve the
problem, but they can actually make it worse!
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Future Environmental Challenges
Future societies, like those just discussed, will be confronted
by both resource scarcity and accumulating pollutants.
Example of challenges: Climate Change and Water
Accessibility
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1. Climate Change: Climate change is a significant and lasting
change in the statistical distribution of weather patterns over
periods ranging from decades to millions of years.
It may be a change in average weather conditions, or in the
distribution of weather around the average conditions (more
or fewer extreme weather events).
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The Greenhouse effect
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Greenhouse Effect: Light from the sun passes through the
atmosphere and warms the surface of the Earth. The Earth’s
surface then releases this heat into the air.
Greenhouses gases in the air (i.e CO2), absorb this heat. If
the greenhouse gases weren’t there the heat would be lost
into space. This process is called the greenhouse effect and
is the reason the Earth’s temperature is warm and allows life
to exist.
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The more greenhouse gases in our atmosphere, the more
heat is trapped, which makes the Earth hotter.
Human activities have significantly increased the level of CO2
and other greenhouse gases in the atmosphere. This
increases the greenhouse effect, trapping more heat in the
atmosphere and causing global temperature to rise.
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Since the Industrial Revolution, greenhouse gas emissions
have increased considerably. These increases have
enhanced the heat-trapping capability of the earth’s
atmosphere.
“Most of the warming over the last 50 years is attributable to
human activities”. Intergovernmental Panel on Climate Change (2007),
Human health can be affected by several factors: increased
heat, smog, rising sea level, floods,
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Moral dimension: Due to their more limited adaptation
capabilities many Developing countries that have produced
relatively small amounts of greenhouse gases are expected to
be the hardest hit as the climate changes.
Dealing with climate change will require a coordinated
international response. Effective?
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2. Water Accessibility: rising demand for resources in the face
of a finite supply
UN: about 40% of the world’s population lives in areas with
moderate-to-high water stress (less Q or ineff Q of water)
By 2025, it is estimated that about 2/3 of the world’s
population (about 5.5 billion) will live in areas facing either
moderate or severe water stress.
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According to U.N. data, Africa and Asia suffer the most from
the lack of access to sufficient clean water.
Up to 50% of Africa’s urban residents and 75% of Asians lack
adequate access to a safe water supply.
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Meeting the Challenges
Intergenerational effects are now more prominent.
Solving problems such as poverty, climate change, ozone
depletion*, and the loss of biodiversity requires international
cooperation.
Because future generations cannot speak for themselves, the
current generation must speak for them. Current policies must
incorporate our obligation to future generations, however
difficult or imperfect that incorporation might prove to be.
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Ozone depletion*
The ozone layer protects the Earth from the ultraviolet rays
sent down by the sun. If the ozone layer is depleted by
human action, the effects on the planet could be catastrophic.
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Countries that unilaterally set out to improve the global
environmental situation run the risk of making their businesses
vulnerable to competition from less dedicated nations.
Industrialized countries that undertake strict environmental
policies may not suffer much at the national level due to
offsetting increases in income and employment in industries
that supply renewable, cleaner energy and pollution control
equipment.
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Some specific industries facing stringent environmental
regulations, however, may well face higher costs than their
competitors, and can be expected to lose market share
accordingly.
Declining market share and employment resulting from
especially stringent regulations and the threat to outsource
production are powerful influences. The search for solutions
must accommodate these concerns.
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• market incentives are not always consistent with promoting
sustainable outcomes.
• many individuals and institutions have a large stake in
maintaining the status quo, even when it involves
environmental destruction.
• Fishery, farmers....
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How will Societies Respond?
Positive feedback loops is one way to answer this Q.
PFLs are those in which secondary effects tend to reinforce
the basic trend. (i.e. New investment generates greater
output, which when sold, generates profits. These profits can
be used to fund additional new investments. Notice that with
positive feedback loops the process is self-reinforcing).
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• When shortages of a commodity, consumers typically begin to
stock the commodity. Hoarding intensifies the shortage.
Similarly, people faced with shortages of food may be forced
to eat the seed that is the key to more plentiful food in the
future.
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• Negative Feedback Loop: earth is a living organism with a
complex feedback system that seeks an optimal physical and
chemical environment.
• Deviations from this optimal environment trigger natural,
nonhuman response mechanisms that restore the balance
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The Role of Economics
• How societies respond to challenges will depend largely on
the behavior of human beings acting individually or
collectively.
• Economic analysis provides an incredibly useful set of tools
for anyone interested in understanding and modifying human
behavior, particularly in the face of scarcity.
• The importance of “incentives”
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Debate 1.2: What Does the Future
Hold?
• Is the economy on a collision course with the environment?
• One group concludes that societies have resourcefully
confronted environmental problems in the past and that
environmentalist concerns to the contrary are excessively
alarmist.
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• On the other hand, some researchers believe that current
development paths and the attendant force they place on the
environment are unsustainable.
• Answer: conflicting views!
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Think!
• Are our institutions so myopic that they have chosen a path
that can only lead to the destruction of society as we now
know it?
• Seeking the answers requires that we accumulate a much
better understanding about how choices are made in
economic and political systems and how those choices affect,
and are affected by, the natural environment.
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Q to be Answered:
• Does the normal reaction of the price system to a resource
shortage provide an example of a positive or a negative
feedback loop? Why?
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• Next: Chapter 2:
• The Economic Approach: Property Rights,
Externalities, and Environmental Problems
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