Economics of Natural Resources

1. Economics of Natural Resources • Introduction

2. Although this is an “Economics of Natural Resources” course, one cannot isolate the importance of environmental importance in such issue

3. Terminology • Pollution: Special case of habitat destruction • Chemical destruction rather than physical: • Air Pollution • Water Pollution • Solid Waste Pollution

4. 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

5. Industrial Water Pollution: • Contamination of water by foreign matter

6. Solid Waste Pollution: • landfills • incineration

7. Economic Development and the Environment • trade off?

8. 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.

9. Example1.1: 1. Mayan civilization

10. 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.

11. 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.

12. The royal dynasty, an important source of leadership in this society, collapsed!

13. 2. Easter Island

14. 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!

15. Sometimes societal reactions not only fail to solve the problem, but they can actually make it worse!

16. 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

17. 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).

18. The Greenhouse effect

19. 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. 

20. 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.

21. 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,

22. 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?

23. 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.

24. 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.

25. 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.

26. 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.

27. 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.

28. 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.

29. 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....

30. 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).

31. 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.

32. 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

33. 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”

34. 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.

35. 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!

36. 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.

37. 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?

38. Next: Chapter 2: • The Economic Approach: Property Rights, Externalities, and Environmental Problems