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Lec 20-21 Land and Natural Resources

This document discusses natural resources, land, and the environment. It begins by outlining the desired learning objectives, which are to understand the economics of natural and non-produced resources, how markets for land function, economics of the environment, and policies to address externalities. It then discusses how natural resources are viewed differently by environmentalists and optimists. It specifically examines land as a fixed resource and concept of rent. It also covers the economics of the environment, externalities as a market inefficiency, and how to convert inefficiencies into efficiencies by balancing social costs and benefits.

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Jutt TheMagician
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101 views

Lec 20-21 Land and Natural Resources

This document discusses natural resources, land, and the environment. It begins by outlining the desired learning objectives, which are to understand the economics of natural and non-produced resources, how markets for land function, economics of the environment, and policies to address externalities. It then discusses how natural resources are viewed differently by environmentalists and optimists. It specifically examines land as a fixed resource and concept of rent. It also covers the economics of the environment, externalities as a market inefficiency, and how to convert inefficiencies into efficiencies by balancing social costs and benefits.

Uploaded by

Jutt TheMagician
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 11

LAND, NATURAL

RESOURCES AND
ENVIRONMENT
1

DESIRED LEARNING
OBJECTIVES

In this chapter, we shall learn:The economics of natural resources,


which are non-produced.
How markets for land and other natural
resources function?
The economics of environment.
Which policies are to be followed to
correct
the
adverse
effects
of
externalities?
2

THE ECONOMICS OF NATURAL


RESOURCES
Usually, we take for granted the plentiful natural
resources, like air, water, and land.
But, many people think that the planet earth is seriously
threatened by our lifestyles.
Environmentalist: On one end, there are people like E.
O. Wilson, the Harvard biologist, who thinks that the
Earths vital resources are just about to be exhausted.
Cornucopian: On other extreme, Julian Simon, a
technological optimist says, our environment is
increasingly healthy, with every prospect that this trend
will continue.
Generally, mainstream economists tend to lie between
these two extremes.
3

FIXED LAND AND ITS RENT


The single most valuable natural
resource is land, but its supply is fixed
and totally unresponsive to price.
Every business needs this resource.
Price for using land for a certain
purpose is called rent.
How do we reach the market
equilibrium in case of land?
See Figure 14.1

ECONOMICS OF ENVIRONMENT
While the environmentalists warn of looming
disasters for human kind due to degradation of
our ecosystem, the optimist technologists take
such concerns as exaggerated.
The task of economists is to: Understand the economic
environmental degradation.

forces

underlying

Explore the nature of environmental externalities.


Describe why they produce economic inefficiencies.
Analyse potential remedies.

EXTERNALITIES
An externality is an activity that imposes
involuntary costs or benefits on others, or an
activity whose effects are not completely
reflected in its market price.
Externalities are both positive and negative, for
e.g.
Dumping of toxic wastes in streams.
Education of parents or children affect those, who
they dont intend to educate.
People, who justify their act of not paying due taxes,
are likely to influence public opinion.
7

MARKET INEFFICIENCY WITH


EXTERNALITIES
Why externality like pollution lead to economic
inefficiency?
Take for e.g., the coal-burning electric utility
Utility firm is to decide how much to reduce its
pollution; but it is also to answer to its owners.
With no pollution cleanup, its workers, plant and
profits will suffer.
On the other hand, complete cleanup is too costly.

Managers, therefore, decide to clean up just to the


point where profits are maximised.
8

MARKET INEFFICIENCY WITH


EXTERNALITIES
Profit maximisation requires that Marginal Private
Benefits to the firm = Cost of additional cleanup.
Marginal Private Cost/Benefits = Rs 10/ton of coal
The firm is producing pollution by using 400 tons of
coal; while Marginal Private Cost/Benefits stand
equal by cleaning just 50 tons, thus Private Cost of
the firm equals 10 x 50 = Rs 500.
And, what about the rest 350 tons of pollution, or
350 x 10 = Rs 3,500 of Marginal Private Costs?
Who would suffer from it?

MARKET INEFFICIENCY WITH


EXTERNALITIES
And, what about social or public cost/benefits,
which the firm did not take into account.
It was estimated that the Marginal Social Benefits
of pollution control are 10 times the Private Benefit.
It means that Marginal Social Benefit/Cost = Rs 90,
which the firm did not take into account
The Rs 90 are excluded since these benefits or
costs are external to the firm and have no effect on
its profits.
10

HOW TO CONVERT INEFFICIENCY


INTO EFFICIENCY?
Now, we see how pollution and other externalities
lead to inefficient economic outcomes.
So, what is the solution?
Here, the economists try to find out the socially
efficient level of pollution by balancing social costs
and benefits.

In a nutshell, efficiency requires that the marginal


social benefits from pollution control equal their
marginal social costs.
11

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