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In this chapter we examine the behavior of competitive firms, such as your local gas station. After completing this chapter, students will be able to learn what characteristics make a market competitive, examine how competitive firms decide how much output to produce, examine how competitive firms decide when to shut down production temporarily,...
Chapter 10 The Environment and Development Copyright © 2009 Pearson Addison-Wesley All rights reserved Economics and the Environment • Environmental issues affect, and are affected by, economic development • Poverty and ignorance may lead to nonsustainable use of environmental resources • Environmental decay and global warming are serious issues we face today Copyrightâ2009PearsonAddisonư Wesley.Allrightsreserved 10ư2 National Income Accounting GDP (or GNI) is the market value of final goods and services • GDP (or GNI) excludes the externalities of production and consumption – Negative externalities: costs imposed on the environment and third parties; e.g., air pollution, land contamination Copyright © 2009 Pearson Addison Wesley. All rights reserved 103 Reasons for Environmental Decay • The common property right over the environment – No one has private property rights over the environment being polluted (e.g., air, ocean water) • The collectively consumed nature of the environment – Benefits received by all users – No one can be excluded from using it Copyright © 2009 Pearson Addison Wesley. All rights reserved 104 Adjustment for Environmental Decay • To adjust for the negative externalities find the “sustainable” Net National Income as NNI* = GNI – Dm – Dn – R – A where – Dm = depreciation of physical capital – Dn = depreciation of environmental capital – R = expenditures required to restore environmental capital – A = expenditures required to avert destruction of environmental capital Copyrightâ2009PearsonAddisonư Wesley.Allrightsreserved 10ư5 Causes of Environmental Decay • • • • Poverty Rapid population growth Rapid urbanization Affluence & excess consumption Industrial production Use of chemical inputs Relaxed environmental laws and weak law enforcements Copyright © 2009 Pearson Addison Wesley. All rights reserved 106 Poverty and Environment • Poverty and lack of development policies would force the people to overuse natural resources: – Cultivate the land without fertilization – Cut the trees for fuel – Contaminate the water – Pollute the air Copyright © 2009 Pearson Addison Wesley. All rights reserved 107 Population Growth and Environment • Rapid population growth put pressure on natural resources: – Clean air – Arable land – Safe drinking water – Forests – Mineral deposits Copyright © 2009 Pearson Addison Wesley. All rights reserved 108 Urbanization and Environment • Rapid urbanization and relaxed environmental laws result in environmental degradation: – Air pollution from fossil fuel consumption – Congestion and noise pollution – Water contamination – Relaxed emission control policies Copyright © 2009 Pearson Addison Wesley. All rights reserved 109 The Global Environment • Consumption patterns of the very poor and very rich • Global warming and rising sea level • Rapid population growth, poverty, and income inequality in LDCs • Rapid deforestation due to pollution and commercial development • Rapid desertification due to lack of rural development Copyright © 2009 Pearson Addison Wesley. All rights reserved 1010 Optimal Resource Use Resource conservation results in a • Higher future price Greater producer surplus Copyrightâ2009PearsonAddisonư Wesley.Allrightsreserved 10ư16 Optimal Resource Use Price Ps P By reducing consumption from 75 to 50, price goes up to PS and producer surplus increases by PSPab a MC b Demand 50 75 Copyright © 2009 Pearson Addison Wesley. All rights reserved Quantity 1017 Common Property Rights • When a scarce resource (e.g., land) is publicly owned and thus freely available to all users (e.g., farming or grazing animals) • Any potential benefit (i.e., producer surplus or scarcity rent) will be competed away as more people use the resource Copyright © 2009 Pearson Addison Wesley. All rights reserved 1018 Common Property Rights Initial employment is L*, where MPL = W and PS = AP*CDW. As more workers use the land, MPL