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more than 93 million people are being added to the world's population of 6 billion ... Population historical records. 7. Population historical records. Table 1.2. ... – PowerPoint PPT presentation

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Economics and Sustainable Development
Donato Romano Department of Agricultural and Land
Economics University of Florence
and International Consultant to the FAO
Objective sustainability of rural development
policies ? relevant concepts and methods
Background Basic microeconomics
  • outline and reading list contents. schedule and
  • course notes

  • Evaluation
  • homeworks
  • quizzes 1 per week
  • final test Wed. Nov 27th

  • Every year. more than 93 million people are being
    added to the worlds population of 6 billion
  • More than 82 million of these additional people
    per year will be born in Third World countries
  • Rapid population growth can have serious
    consequences for the well-being of humanity

Population historical records
Population historical records
Population historical records
Population geographic distribution
Population geographic distribution
Population age structure
The hidden momentum
The demographic transition (in W. Europe)
The demographic transition (in LDCs)
The microeconomic theory of fertility
The microeconomic theory of fertility
  • Policy implications
  • an increase in the education of women and a
    consequent change in their role and status,
  • an increase in female non-agricultural wage
    employment opportunities, which raises the price
    or cost of their traditional child-rearing
  • a rise in family income levels through the
    increased direct employment and earnings of a
    husband and wife or through the redistribution of
    income and assets from rich to poor,
  • a reduction in infant mortality through expanded
    public health programs and better nutritional
    status for both parent and child,
  • the development of old-age and other social
    security systems outside the extended family
    network to lessen the economic dependence of
    parents on their offspring.

Population-Environment-Poverty Links
Carrying capacity
Carrying capacity
Population pressure and technological change
Greenhouse effect
Greenhouse effect
  • Why should this greenhouse effect be thought of
    as a problem?
  • The additional warming is what causes concern
  • many potentially damaging effects
  • some beneficial ones
  • The gases producing this layer around the earth
  • water vapor,
  • carbon dioxide (CO2),
  • methane (CH4),
  • nitrous oxide (NO),
  • some chlorofluorocarbons (CFCs), and
  • ozone (O3)

Greenhouse effect
These gases are a mix of natural events and
anthropogenic factors ? determining the relative
contributions of these gases is complex
Greenhouse effect
  • Two features
  • uncertainty
  • commitment to some degree of warming.
  • Two policy responses
  • prevention (to reduce trace gas emissions)
  • adaptation

Greenhouse effect
  • Projected scenarios (IPCC estimates)
  • scenario A - business as usual no controls are
    exercised over current rates of emission growth ?
    global mean temperatures will increase 1C by
    2025 and 3C by 2100 compared with temperatures
    in 1990, i.e. a rise of 0.3C per decade
  • scenario B deforestation is halted, natural gas
    is substituted for coal, which has a higher
    carbon content, and energy conservation measures
    are adopted ? a rise of 0.2C per decade
  • scenario C increasingly strict abatement
    measures are undertaken, and energy from fossil
    fuels is aggressively replaced by renewable
    energy ? warming is held to 0.1C,

Greenhouse effect
Effects of global warming
  • Projected scenarios (IPCC estimates)
  • Rise in regional temperature mid-latitude
  • summer soil moisture may be reduced, and crops
    could be affected by summer droughts
  • reduction of water supplies, both of surface
    water and groundwater aquifers
  • changes in hydrological regimes
  • Rise in sea level melting mid- and
    high-latitude small glaciers
  • and ice sheets ? mean rise in sea level of 6
    cm a decade
  • loss of low-lying land to the sea
  • salt intrusion to freshwater systems and
  • storm surges that cause floods
  • Frequent and severe events alteration of the
    frequency and
  • variability of events related to the weather
  • droughts, storms, and floods may be more frequent
    and severe

Effects on LDCs
  • LDCs more dependent than DCs on NR ? more
    sensitive to changes in climate
  • the agricultural systems of many LDCs are based
    on low-lying deltaic land ? flooding and
    saltwater intrusion
  • many agricultural systems rely on natural
    rainfall rather than irrigation systems ?
    problems with changes in rainfall patterns
  • many small LDCs are island communities at special
    risk from severe weather events such as
    hurricanes and cyclones
  • the very poverty of many LDCs will preclude them
    from undertaking the adaptive policies, such as
    sea defenses, that may be needed

Ozone layer depletion
  • Stratospheric ozone blocks ultraviolet radiation
    from the sun
  • ? depletion of the ozone layer increases the
    incoming UVR
  • increase of skin cancers
  • suppressions of the immune system in the human
  • eye disorders
  • reduced or distorted growth in plants
  • Cause (mid 1970s) chlorofluorocarbons (CFCs)
  • depletion of the ozone layer
  • contribute to global warming

? 1989 Montreal Protocol
Loss of Biodiversity
Biodiversity is the totality of genes, species,
and ecosystems. The term is helpful for
reminding us that it is not just the total stock
of living things that matters, but the range of
different living things.
  • Protecting the worlds biodiversity is a
    difficult task
  • 30-50 million species
  • only 1.43 million species have been
    scientifically described
  • most undescribed species inhabit the tropical
  • rate of loss of species is not known, but
    evidence suggests that the rate of extinction has
  • perhaps one-quarter of existing species are at
    risk of extinction in the next twenty to thirty

Loss of Biodiversity
Loss of Biodiversity
  • Causes of biodiversity loss
  • population growth,
  • ill-defined land and resource rights,
  • market, planning, and government failures
  • If the above factors explain habitat loss,
  • their reversal or containment will assist the
    conservation process, but
  • in order to avoid to alienate people, it is
    required community involvement in protected areas

The Mediterranean Basin
  • Why the Mediterranean Sea is subject of
    environmental concern?
  • land-locked
  • surrounded by countries with various
    combinations of
  • rapid population growth,
  • industrialization,
  • development,
  • massive changes in land use
  • Two kinds of problems (Box 3.1)
  • common problems, i.e. they are shared by two or
    more countries
  • problems occuring separately in several countries

The Mediterranean Basin
Both types of problems are reciprocal
externalities that require bilateral or
collective action
  • Examples
  • heavily polluted rivers
  • declining fisheries (because of pollution as well
    as over-fishing)
  • reduced wetland areas (because of land
    reclaimation, urbanization)
  • loss of forests and natural habitats
  • water deficiencies and water quality problems
  • soil depletion (overgrazing, overcultivation,
    salinization, water-logging)
  • solid waste poorly managed

The Mediterranean Basin
  • Causes
  • population growth by 2025 the 1985 population
    of 350 million persons could have increased by
    200 million
  • economic policy energy and irrigation are
  • institutional failure tenurial arrangements,
    weak controls over development, poor political
    awareness of environmental issues
  • Actions
  • contain population pressure on natural resources
  • reduce tenurial conflicts
  • getting resource prices right (i.e. reflect
    social costs)
  • strengthen institutions

Water Resources in the Middle East
Why the water resources are so important for the
Middle East? No other region of the world
embraces such a large area, with so many people
striving so hard for economic growth on the basis
of so little water
  • The Mashrek lies in a transition zone. The
    dominant hydrological characteristic is the
    combination of
  • aridity and
  • uncertainty
  • Whereas regions of higher rainfall sometimes
    suffer droughts and regions of lower rainfall
    sometimes experience floods, this region has to
    cope with both

Water Resources in the Middle East
Water Resources in the Middle East
Water Resources in the Middle East
  • Three water crises at the same time
  • quantity demand for fresh water in the region
    exceeds the naturally occurring, renewable supply
  • quality much of the regions limited water is
    being polluted from growing volumes of human,
    industrial, and agricultural wastes
  • equity the same water is desired simultaneously
    by different sectors in some society or wherever
    it flows across (or under) an international border

Water Resources in the Middle East
  • Actions
  • quantity much more attention should be paid to
    the low-capital-decentralized options than to the
    high-capital-centralized ones. To a large extent,
    the former are not only technically proven but
    typically more cost effective, given the marginal
    costs of new conventional water supply
  • quality intervene to fix the major causes of
    pollution, i.e. overpumping of aquifers, runoff
    from agriculture, discharge of human and
    industrial wastewater, and loss of habitat
  • equity develop internal as well as international
    institutions to manage conflicts

Land Degradation and Desertification
  • What is land degradation?
  • soil erosion
  • waterlogging
  • salinization
  • land use change

What is desertification? land degradation in
arid, semi-arid and dry sub-humid areas resulting
from various factors, including climatic
variations and human activities
Land Degradation and Desertification
  • Why is land degradation a problem?
  • during the 1980s, the amount of per capita arable
    land declined by 1.9 per annum
  • that is, every year, around 70,000 km2 of
    farmland are abandoned because the soils are too
    worn out and degraded for crop production
    another 200,000 km2 suffer from reduced
  • about 1.4 billion hectares of arable land have
    been taken out of agricultural production because
    of urban sprawl between 1980 and the turn of the
  • overall land degradation of various sorts is
    estimated to be causing an annual loss of 12
    million tons of grain output almost half of all
    the gains in grain output each year

Land Degradation and Desertification
  • Why is desertification a problem?
  • one-third of the earths land is arid or
  • some 600 million people live there
  • more than 20 of the earth - home to 80 million
    people - is directly threatened by
  • some 100 countries are affected.

Land Degradation and Desertification
  • Causes of land degradation/desertification
  • population growth populations are increasing as
    fast in arid lands as elsewhere
  • overcultivation,
  • overgrazing,
  • deforestation,
  • poor irrigation

Traditional rainfed cropping systems break down
under pressure from growing populations and the
increased planting of cash crops
people takes too much from the soil and puts too
little back
The Human-Environment Relationship
Firms (Production)
Households (Consumption)
Functions of the Environment
  • Source of raw materials
  • depletable
  • renewable
  • Sink for waste
  • biodegradable/short-lived/non-toxic
  • toxic/persistent
  • General life support
  • water cycle
  • carbon cycle
  • ozone layer

The First Two Laws of Thermodynamics
Closed vs. open systems exchange of energy and
Earth as a closed system
  • First law of termodynamics energy and matter
    cannot be created or destroyed
  • the mass of materials flowing into the economic
    system has to either accumulate in the economic
    system or return to the environment as waste
  • excessive wastes can depreciate the asset
    limited absorptive capacity
  • Second law of termodynamics entropy increases
  • no conversion from one form of energy to another
    is completely efficient and that the consumption
    of energy is an irreversible process
  • over the very long run, the growth process will
    be limited by the availability of solar energy
    and our ability to put it to work

A Classification of Natural Resources
  • What is a resource?
  • utility vs. altruism
  • natural vs. man-made
  • renewable vs. non-renewable (or exhaustible)
  • - growth and reproduction
  • - carrying capacity (max stock)
  • - rate of extraction
  • conditionally vs. uncoditionally renewable

A Classification of Natural Resources
Natural resources
  • oil
  • coal
  • minerals

Unconditionally renewable
Conditionally renewable
Non-biological flow resources
Non-biological cycling resources
Simple biological resources
Complex resources
  • solar energy
  • tidal energy
  • wind energy
  • water
  • nitrate
  • CO2
  • O2
  • mammals
  • fish
  • crops
  • soil
  • ecosystems

Special Features of Agricultural Resources
  • What are, if any, the special features of
    agricultural resources?
  • inter-temporal or long-run nature
  • ? optimal time path of use
  • ? uncertainty
  • close linkages between the physical system and
    biological system
  • complexity of involved resources
  • ? renewable exhaustible
  • ? quality differentiated
  • spatial nature of resources

Ideas of Development
1950s-60s economic growth 1960s-70s growth
with redistribution 1970s-80s basic
needs 1980s-90s sustainable development
  • Sustainablity is concerned with thes 3 Es
  • economic dimension efficiency
  • ecological dimension ecosystem functioning and
    environment maintenance
  • equity and ethical dimension distributional
    consequences of policy alternatives

Views on Sustainable Development
a) Economists
Sustainable economic development involves
maximizing the net benefits of economic
development, subject to maintaining the services
and quality of natural resources over time
(Pearce et al., 1987)
Sustainable economic development refers to the
optimal level of interaction between three
systems - the biological, the economic and the
social - through a dynamic and adaptive process
of trade-offs (Barbier, 1989)
Views on Sustainable Development
b) Ecologists
Sustainability (is) the ability to maintain
productivity, whether as a field, farm or nation,
in the face of stress or shock (Conway and
Barbier, 1990)
Sustainable development based on prevailing
patterns of resource use is not even
theoretically conceivable ... a new definition of
sustainable development is development that
minimizes resource use and the increase in global
entropy (Rees, 1990)
Views on Sustainable Development
c) Sociologist
Demand on the environment that are culturally
determined Are the institutions which are used
to manage the environment subject to local
control and have they evolved to meet local
The underlying global economic and political
factors which encourage environmental degradation
need to be addressed, and a global redistribution
of wealth has to occur. Only then can sustainable
development on a global scale become a realistic
Views on Sustainable Development
Brundtland Commission
Development that meets the needs of the present
without compromising the ability of future
generations to meet their own needs (WCED, 1987)
  • Two different meanings
  • the stock of natural capital in particular must
    be left intact for the next generation
  • the aggregate stock of manufactured and natural
    capital must not decline between one generation
    and the next ? trade-offs

Views on Sustainable Development
Sustainable Development is the management and
conservation of the natural resource base, and
the orientation of technological and
institutional change in such a manner as to
ensure the attainment and continued satisfaction
of human needs for present and future
generations. Such sustainable development (in the
agriculture, forestry and fisheries sectors)
conserves land, water, plant and animal genetic
resources, is environmentally non-degrading,
technically appropriate, economically viable and
socially acceptable (FAO, 1989)
Agriculture in Economic Development
  • Green revolution
  • Objectives
  • increasing per capita income
  • rising per capita food production
  • Three interrelated actions
  • staple cereals that produced early maturing,
    day-length insensitive and high-yielding
    varieties (HYVs)
  • packages of high payoff inputs, such as
    fertilizers, pesticides and water regulation
  • implementation in the most favorable
    agro-climatic regions and for farmers with the
    best expectations of realizing the potential

Agriculture in Economic Development
  • Post green revolution problems
  • equity
  • widely adopted irrespective of farm size and
  • soil quality, access to irrigation water, etc.
    have been formidable barriers to adoption
  • stability
  • monocropping associated with increased output
    variability (pests, diseases, and weeds)
  • year-to-year fluctuations in input use arising
    from shortages or price changes
  • productivity
  • diminishing returns to the HYVs and high pay-off

Agriculture in Economic Development
  • A new phase in Ag Dev? Agricultural Sustainable
  • World Bank successful Ag Dev
  • sustainable, by insuring the conservation and
    proper use of renewable resources
  • promote economic efficiency
  • its benefits must be distributed equitably
  • technological and research priorities to make
    agricultural production in the Third World more
  • IFAD
  • strategies for implementing sustainable Ag Dev in
    resource poor environments
  • strategies for spreading benefits to the rural

Agricultural Sustainability
PRODUCTS Food and fiber
Agricultural Sustainability
  • A) The sustainability of resources
  • renewable vs. exhaustible resources ? husband
    renewable resources in such a way as to provide a
    long-term sustainable base for production
  • frontier and poor societies ? unsustainable
    resources use, that is intensive application of
  • - capital
  • - technology
  • - (labor)
  • LDCs cannot afford the technological investment,
    nor do they have dependent countries which they
    can exploit

Agricultural Sustainability
  • B) Mismatched technologies
  • within the agricultural production system? lack
    of knowledge or appropriate skills ? low
    efficiency ? higher costs
  • outside the agricultural production system ?
    agrochemicals ? human diseases, pollution, etc.

What is agricultural sustainability? The ability
to maintain productivity, whether of a field or
farm or nation, in the face of stress or shock (?
resilience). A stress may be increasing salinity,
or erosion, or debt etc.
Agricultural Sustainability
a) Sustainability (? resilience)
  • Function of
  • the intrinsic characteristics of the system,
  • the nature and strength of the stresses and
  • the human inputs which may be introduced to
    counter these stresses and shocks

Agricultural Sustainability
b) Productivity
Output of valued product per unit of resource
input land (solar energy), labor (human
energy), capital (fossil fuel energy)
Agricultural Sustainability
c) Stability
The constancy of productivity in the face of
small disturbing forces arising from the normal
fluctuations and cycles in the surrounding
environment climate, market demand, etc.
Agricultural Sustainability
d) Equitability
The evenness of distribution of the productivity
of the agricultural system among the human
Agricultural Sustainability
e) Efficiency
Maximum economic efficiency is equivalent to
maximum profit
Maximization with sustainability constraints
Spatial and Hierarchical Dimensions
FAO Criteria for SARD
  • Meeting the basic nutritional requirements of
    present and future generations, qualitatively and
    quantitatively while providing a number of other
    agricultural products
  • Providing durable employment, sufficient income,
    and decent living and working conditions for all
    those engaged in agricultural production
  • Maintaining and, where possible, enhancing the
    productive capacity of the natural resource base
    as a whole, and the regenerative capacity of
    renewable resources, without disrupting the
    functioning of basic ecological cycles and
    natural balances, destroying the socio-cultural
    attributes of rural communities, or causing
    contamination of the environment
  • Reducing the vulnerability of the agricultural
    sector to adverse natural and socio-economic
    factors and other risks, and strengthening

Macro Policies and the Environment
Macro Policies and the Environment
Macro Policies and the Environment
Macro Policies and the Environment
Macro Policies and the Environment
Macro Policies and the Environment
Common Roots of Economic and Environmental
  • Policy failures
  • growth without safeguards
  • lack of proper sector policies
  • Market failures
  • monopolies
  • imperfect information
  • externalities
  • Governance failures
  • lack of monitoring and control
  • weak management
  • lack of transparency
  • collusion
  • Financial sector problems
  • excessive exposure to risk
  • weak portfolio
  • unsustainable business practices
  • Environmental problems
  • excessive pollution
  • excessive NR depletion
  • unsustainable industrial, agricultural, and NR
    management practices

Macro Policies and the Environment
  • if one traces the impacts of a macroeconomic
    policy change, one can find effects across many
    sectors, not always self-evident
  • the environmental impacts of economic policies
    will depend critically on the economic
    institutions that are in place and that govern
    the use of the resource base and the
    environmental sinks of the economy
  • where there are market imperfections of one kind
    or another, and where these cannot be resolved at
    source, it is desirable to use economic
    instruments specifically to address the
    environmental issues

Some Introductory Concepts
  • What is economics about?
  • scarcity, allocation, and trade-offs
  • values total economic value
  • - market vs. non-market
  • - use vs. non-use
  • positive vs. normative economics
  • environmental vs. natural resource economics
  • neoclassical vs. ecological economics

Some Introductory Concepts
Some Introductory Concepts
Neoclassical Economics
  • sustainable growth
  • natural resource can be substituted for capital
  • technical progress will relax the limits to
  • maximum sustainable yield
  • recycling
  • sustainability of economic development
  • golden rule resource growth potential ?
    discount rate - rate of exogenous technical
  • irreversibilities

Ecological Economics
  • sustainable growth
  • the substitution of capital for natural
    resources is limited
  • technical progress will relax the limits to
  • functions of the environment are essentially
    intertwined ? additional restriction on economic
  • full recycling of energy is not possible
  • sustainability of economic development
  • continuous co-evolutionary feedback between
    economy and environment
  • the economy has to adapt itself
  • economy natural environment culture
    technology political system population
    ecological complex

Recalling Some Basics
  • Demand
  • downward sloping
  • willingness to pay (WTP)
  • reservation price max WTP
  • marginal benefits

Recalling Some Basics
  • Consumer Surplus
  • gross total benefits
  • total purchasing costs
  • net total benefits

Recalling Some Basics
  • Marginal Costs
  • costs of each additional Q
  • MC are rising
  • why?
  • MC and supply curve

Recalling Some Basics
  • Firm equilibrium
  • max p ? MC MR
  • competitive market ?
  • MR P
  • why?
  • willingness to accept (WTA)

Recalling Some Basics
  • Market supply
  • horizontal sum of all firm supply curves

Recalling Some Basics
  • Producer Surplus
  • gross total benefits (revenue)
  • total production costs cost of the goods sold
  • net total benefits

Recalling Some Basics
  • Market equilibrium
  • market vs. individual curves
  • price that clears the market
  • why?
  • equilibrium price
  • equilibrium quantity
  • decentralized mechanism

Recalling Some Basics
  • Welfare
  • why to exchange?
  • benefits of exchanging
  • costs of exchanging
  • net social benefits
  • optimality
  • economic efficiency
  • at the equilibrium
  • - P MC
  • - WTP MC
  • - MB MC

Recalling Some Basics
  • Max NSB
  • max CS PS
  • a competitive equilibrium is a social optimum
  • Pareto optimality
  • FTWE under a set of speci-fic assumptions, any
    compe-titive equilibrium is Pareto optimal

Recalling Some Basics
  • Market failures
  • market power e.g. monopoly
  • externalities uncompensated effect on a third
    party, e.g. pollution, protection from floods
  • ill-defined property rights e.g. pollution,
    open access
  • public goods non excludability non rivalry,
    e.g. landscape, knowledge
  • imperfect information incompleteness or
    asymmetries, e.g. decisions under uncertainty,
    contract design (moral hazard, adverse selection)

Recalling Some Basics
  • Government failures
  • Government intervenes to
  • - correct for market failures
  • - achieve non-efficiency objectives
  • trade-off between efficiency and equity e.g.
    price ceiling intervention
  • two kinds of policy failure
  • - underpricing natural resources e.g., timber
    or water subsidies
  • - rent-seeking or directly unproductive
    profit-seeking (DUP)
  • activities

Recalling Some Basics
Efficiency vs. equity price ceiling policy
PS CS Tot -c-b -ab -a-b
Environmental Economics
  • Pollution
  • negative externality
  • social marginal costs (SMC)
  • private marginal costs (PMC)
  • total social marginal costs TSMC SMC PMC
  • total vs. marginal costs
  • internalizing a -ve externality
  • social vs. private optimum
  • - no 0 pollution
  • - balancing market and non-
  • market goals
  • what if a ve externality?
  • NSB C D E

Environmental Economics
  • Env. Improvements
  • marginal benefit curve
  • marginal benefits of envir. improvement vs.
    marginal costs of pollution
  • demand curve for envir. quality improvement
  • WTP for environmental quality improvement
  • trade-off between environm. improvement and
    other things we could do with income
  • total benefits to the society
  • total benefits vs. CS

Environmental Economics
  • Env. Improvements
  • marginal cost curve
  • environmetal improvement does not come for free

Environmental Economics
  • Optimum level of pollution/environm. improvement
  • max NSB from environmental improvement NSB TB
    TC ? MB MC
  • socially efficient quantity of pollution
  • who should enjoy the benefits and who should
    bear the costs?

Environmental Economics
  • Abatement vs. pollution damages
  • Two ways to look at the same problem
  • - max NSB ? MB(A) MC(A)
  • - min TSC ? MD(Q) MC(Q)
  • socially efficient quantity of pollution
  • who should enjoy the benefits and who should
    bear the costs?

Natural Resource Economics
  • Biological Model
  • population growth curve Xf(t)
  • logistics curve
  • carrying capacity XMAX
  • minimum viable population XMIN

Natural Resource Economics
  • Biological Model
  • population growth rate dX/dt f(X)
  • identify A, B and XMAX
  • maximum sustainable yield
  • MSY ? highest possible harvest

Natural Resource Economics
  • Economic Model
  • effort
  • if E ? ? X ? and viceversa
  • doubling effort does not mean doubling harvest

Natural Resource Economics
  • Economic Model
  • harvest
  • Hf(E)
  • what about X?

Natural Resource Economics
  • Economic Model
  • total revenue TRP?H
  • total costs TCW?E
  • single owner equilibrium (HPROF, EPROF)
  • - max p vs. MSY
  • - conservation
  • open access (i.e. no owner) equilibrium (HOA,
  • - OA vs. max p vs. MSY
  • - conservation

Natural Resource Economics
  • Economic Model
  • total revenue TRP?H
  • total costs TCW?E
  • single owner equilibrium (HPROF, EPROF)
  • - max p vs. MSY
  • - conservation
  • open access (i.e. no owner) equilibrium (HOA,
  • - OA vs. max p vs. MSY
  • - conservation
  • The Tragedy of the commons (Hardin 1968)

Natural Resource Economics
Introducing time discounting
Marginal product Rate of capital appreciation
Discount rate

Property Rights
  • Coase Theorem
  • what is a property right?
  • Pareto improvement
  • sufferers property right
  • polluters property right
  • problems
  • - transaction costs
  • - open access
  • - information gathering costs
  • - distributive impacts

Resource Management Regimes
  • private
  • - individuals have a duty to observe the rules
    of use determined by the
  • controlling agency
  • - the agency has the right to determine those
  • state
  • - individuals have the right to undertake
    socially acceptable uses and a
  • duty to refrain from unacceptable uses
  • - others have a duty to respect individual
  • common
  • - a management group has the right to exclude
  • - non-members have a duty to abide that
  • - co-owners comprise the management group and
    have rights and duties
  • related to the use of resources
  • open access (no property)
  • - no users or owners are defined
  • - individuals have the privilege but not the
    right to use resources

Renewable Resources and Games
  • prisoners dilemma game
  • - non-cooperative game
  • - isolation
  • - no binding agreement
  • - the resource must be privatized or be subject
    to some form of state
  • regulation and control
  • assurance game
  • - cooperative game
  • - interdependence
  • - binding agrrement
  • - overexploitation of renewable resources in
    open access and common
  • property situations can be solved by
    cooperative agreement
  • extensions
  • - incentives/institutions
  • - repeated over time
  • - no single regime is universally best suited
    to the wise NR management

Economic Instruments for Envir. Policy
  • Pigovian tax
  • optimal tax
  • need to know
  • - MNPB
  • - MEC
  • information aymmetries?

Economic Instruments for Envir. Policy
  • Pigovian tax
  • low-cost solution to standard setting
  • standard at S2 TACst OAS2 OBS2 OCS2
  • tax t TACtax OXS1 OBS2 OYS3
  • TACst - TACtax S1XAS2 - S2CYS3
  • S1XAS2 gt S2CYS3 ? TACst gt TACtax

Why to Prefer Environmental Taxes?
  • directly into the prices of the goods, services
    or activities polluter-pays-principle
  • create incentives for producers and consumers
  • more cost-effective pollution control than
  • spur to innovation
  • raise revenues which can be used directly to
    improve the environment

Why Are Envir. Taxes Not Widespread?
  • uncertainty about the justice of Pigovian taxes
  • lack of knowledge of the damage function

Economic Instruments for Envir. Policy
  • Envir. Standards
  • command-and-control
  • need to have
  • - monitoring agency
  • - penalties
  • only by accident optimal
  • for being optimal
  • - standard at Q
  • - penalty equal to P
  • - certainty of penalty

Taxes vs. Standards
  • taxes as least-cost solutions
  • taxes are dynamically efficient
  • administrative costs?
  • outright prohibition

Economic Instruments for Envir. Policy
  • Marketable Permits
  • Q optimal number of permits
  • P optimal price of permits
  • S is the supply curve
  • MAC curve demand curve

Economic Instruments for Envir. Policy
  • Marketable Permits
  • cost minimization
  • low-cost polluters sell permits and high-cost
    polluters buy them

Economic Instruments for Envir. Policy
  • Marketable Permits
  • new entrants
  • opportunities for non-polluters
  • inflation and adjustment costs
  • technological lock-in
  • spatial issues
  • types of permit systems
  • - ambient permit system (APS)
  • - emissions permit system (EPS)
  • - pollution offset (PO) system

Agricultural Pollution
  • Non-Point Source Pollution
  • spatial diffusion
  • high variability in space and time
  • - polluters responsibility (who?)
  • - pollution level at the source (how much?)
  • - ecological and economic damage caused (how?)
  • ? traditional instruments cannot be used

Agricultural Pollution
  • Input-based instruments
  • input taxes and subsidies
  • - the regulatory agency should know the private
    production function, but
  • - information asymmetries
  • input proxies and empirical models
  • - information asymmetries
  • - other uncertainties

Agricultural Pollution
  • Ambient-based instruments
  • concentration of pollutant in the environment
  • collective penalties
  • - Segersons (1988) scheme, but
  • - likely penalization of farms if close to the
  • - dynamic incentive disappears
  • - costs of information and monitoring borne by

Cost-Benefit Analysis
  • What is Cost-Benefit Analysis (CBA)?
  • CBA is a set of operational rules, that guides
    public choice among several project alternatives
  • CBA is a method to make decisions
  • decision-making involves always more than one
    alternative (at least two with and without)
  • the evaluation process is made comparing
    advantages and disadvantages
  • advantages and disadvantages are evaluated with
    reference to certain objectives
  • CBA is applied mainly in the public sector

Cost-Benefit Analysis
  • Two types of analysis
  • private sector financial analysis
  • public sector economic and social analysis
  • different objective function ? different
  • same evaluation phases and decision rules

Cost-Benefit Analysis
Financial analysis vs. economic analysis
Cost-Benefit Analysis
  • Why Cost-Benefit Analysis?
  • because the market fails to reach the social
  • to overcome the paternalistic approach at public

Cost-Benefit Analysis
  • How CBA must be carried out?
  • two fundamental principles
  • - welfarism individual preferences
  • - Pareto principle potential Pareto improvement
  • two issues
  • - how to compare different individual welfare
    status? Kaldor-Hicks compensation criterion
  • - how to measure the impacts of different
    alternatives? Money as numeraire

  • Why do we need discounting?
  • projects usually have a duration longer than 1
  • current consumption is valued higher than future
    consumption (inter-temporal preference)
  • How to discount?
  • cash flow stream of benefits and costs on the
    time scale
  • how much a future amount of money is worth today
  • VnV0(1r)n ? V0Vn(1r)-n

Discounted cash flow
Investment Criteria
Net Present Value (NPV) sum of all items in a
discounted cash flow, i.e. it is the value
obtained summing all discounted net benefits
  • decision rules
  • acceptability NPVi ? ? ? i
  • choice NPVi ? NPVj ? i ? j

It is a monetary value It depends on the value
of the discount rate (exogenous)
Investment Criteria
Benefit/Cost Ratio (B/C) ratio between the sum
of discounted benefits and the sum of discounted
  • decision rules
  • acceptability B/Ci ? 1 ? i
  • choice B/Ci ? B/Cj ? i ? j

It is a pure number It depends on the value of
the discount rate (exogenous)
Investment Criteria
Benefit/Cost Ratio (B/C) the discount rate that
yields NPV equal to 0 or B/C equal to 1
  • decision rules
  • acceptability IRRi ? r ? i
  • choice IRRi ? IRRj ? i ? j

It is the average yearly return of a given
investment It does not depend on the value of
the discount rate (?)
Investment Criteria
Investment Criteria
Sensitivity Analysis
  • CBA abuse can be rampant
  • SA is explicit discussion of the sensitivity of
    NPV and B/C ratios to changes in
  • - assumptions
  • - figures
  • - calculation methods
  • highlight all parts of an analysis that may be
    controversial or uncertain
  • provide scenarios based on range of those figures
  • it should be automatic in any good CBA

Total Economic Value
  • What does environmental valuation mean?
  • Valuation means monetary valuation
  • WTP or WTA ? preferences
  • economic value measurements help to identify the
    social optimum
  • - ex ante, i.e. before deciding on environmental
  • - ex post, i.e. after a regulation has been
  • demand curves Marshallian vs. Hicksian
  • exact measures compensating vs. equivalent

Total Economic Value
Total Economic Value
A taxonomy of components
Total Economic Value
  • TEV and Decision-Making
  • Damage and benefit are obverse sides of the same
  • Cost-benefit analysis
  • - proceed with the development (BD - CD - BP) gt
  • - do not develop (BD - CD - BP) lt 0
  • TEV measures BP

Total Economic Value
  • Evaluation Techniques
  • Indirect
  • - change in the vector of price HPM
  • - change in the vector of quantities TCM
  • Direct
  • - hypotetical CVM
  • - experimental
  • weak complementarity condition

Evaluation techniques
  • Hedonic price method (HPM)
  • look for a market in which private goods (e.g.
    real estate) or factors of production (e.g.
    labour), that are linked to the environmental
    good through a complementarity relationship, are
    bought and sold
  • the good is fully described by its attributes,
    which influence the price of the good
  • example real estate property

Evaluation techniques
  • Hedonic price method
  • implicit price for the one unit of the
    environmental characteristic ? PP/? ENV
  • marginal WTP

Evaluation techniques
  • Travel cost method (TCM)
  • whenever the consumption of an environmental
    good involves some travel costs
  • visitors to a given natural area enjoy an amount
    of gross benefits at least equal to the costs
    they incur
  • knowing travel costs, it is possible to infer the
    use value of the natural area
  • example outdoor recreation

Evaluation techniques
  • Travel cost method
  • two step procedure
  • I) Kj?ixij/Aj ?ifi(TCij, wij)
  • II) demand for OR
  • x(P)?ijAjfi(TCijP, wij)
  • use value of OR
  • V?ijAj ?0?P fi(TCijP, wij)dP
  • where P is the reservation
  • price, i.e. fi(TCijP, wij)0

Evaluation techniques
  • Contingent valuation method (CVM)
  • use survey questions to elicit WTP for provision
    of an environmental good
  • hypothetical market
  • - description of the good
  • - hypothetical circumstances (level of
    provision, payment
  • vehicle, available substitutes, etc.)
  • - questions to elicit WTP
  • also respondents characteristics ? benefit
  • example any environmental good

Evaluation techniques
  • CVM formats
  • open-ended
  • iterative bidding game
  • payment card
  • close-ended, single bounded
  • close-ended, double bounded

Evaluation techniques
  • CVM formats
  • open-ended
  • iterative bidding game
  • payment card
  • close-ended, single bounded
  • close-ended, double bounded

Evaluation techniques
  • CVM formats
  • open-ended
  • iterative bidding game
  • payment card
  • close-ended, single bounded
  • close-ended, double bounded

Evaluation techniques
  • CVM issues
  • Reliability extent to which the variance of an
    estimate, such as mean WTP, is due to random
    sources ? survey design
  • Validity extent to which an instrument measures
    the concept under investigation, i.e. presence of
    systematic errors (bias)
  • - strategic bias ? incentive compatibility
  • - hypothetical bias ? scenario
  • - design bias ? ordering wording focus

Evaluation techniques
  • Conclusions
  • Indirect only if weak complementarity ? only use
  • Direct all components of TEV ? CVM more
    versatile tool

How important is to estimate single TEV
components? Operationally we focus on the TEV of
a resource, not on its components