ZAMBIAN OPEN UNIVERSITY
SCHOOL HUMANITIES AND SOCIAL SCIENCES
STUDENT NAME: CHARITY NAMWINGA
PROGRAM: DEVELOPMENT STUDIES
COURE: ENVIRONMENT AND DEVELOPMENT IN DEVELOPING COUNTRIES
COURSE CODE: DS8
YEAR: SECOND YEAR
LECTURER: MS K.CHINYAMA
DUE DATA: 27TH APRIL, 2018
ASSSIGNMENT NO: 2 (Two)
PHONE NUMBER: 0979384569
ADDRESS: MINISTRY OF AGRICULTURE, CHIPAA
Environmental economics is one of the fields where there are varied approaches of how to deal with the different components. There are two extreme views in this aspect of economics, namely the neoclassical approach and the ecological approach. A number of ‘hybrid’ approaches which incorporate aspects from each of these main approaches exist as well. When it comes to their views of sustainable development, the differences between approaches continue. According to the United Nations a development is said to be sustainable when it is able to “meets the needs of the present without compromising the ability of future generations to meet their own needs” (WCED, 1987).
The neoclassical view, or weak sustainability view, is currently the mainstream economists’ view of sustainable development. Neoclassical theory is based on marginal analysis. This assumes that individuals make decisions by comparing the changes in satisfaction or revenues to changes in cost. Natural resources are not views as a constraint on economic activity.
According to Tietenberg (2014) “sustainability, from a neoclassical point of view can be defined as the maximization of human welfare over time, in other words promoting a high growth view”.
Some economists simplify this to the maximization of utility derived from consumption which allows for an easy measurement. This simplification, however useful, has been criticised as an over simplification. Broadly speaking in terms of this approach, nature and capital do not possess an intrinsic value, they are merely instruments used to achieve maximum utility. According to Hussen, (2004) cited by Common (2005) “neoclassical economists do not completely reject the view that natural resources are non-renewable, however they believe that this does not suggest that economic growth needs to be limited”.
Neoclassical economists’ view sustainable development as a reflection of societies desire to have a non declining well-being over time. Therefore it is important to ensure that savings rates are sufficiently high enough to ensure that the available capital stock available remains constant inter-generationally. The neoclassical school of thought is based on four key assumptions:
Market prices are indicators of scarcity, the market system is effective and information is conveyed swiftly.
Environmental resources are valued in terms of consumer preference. This in turn is reflected via the market system. It is believed that markets automatically adjust for scarcity via the price system. Therefore as a resource become scarcer, its factor price will always respond to acute scarcity and the corresponding price increase will induce the development of mechanisms to prolong the factor use as well as alternatives (backstop technologies) . The price system is assumed to effectively value the various resource capitals which in turn should generate the rate of substitution between resources. Neoclassics recognise the existence of externalities within the market, but feel that slight adjustments will account for these factors. (Vivien, 2008)
The Neoclassical provides the most complete and detailed picture of the economy-environment relationship. Glorifying the couplet of methodological individualism and market relations, the theory locates the economic explanation of the degradation of nature-s-expressed operationally in terms of the overuse of natural resources and the waste disposal above the ecosystem’s assimilative capacity-in a lack of markets for environmental goods and services.
The non-existence of markets is thus regarded as being responsible for the failure of people to recognize the otherwise positive prices of environmental goods and services. Yet, this malady-the source of so-called “market failures”-is also seen to be remediable via institutional set-ups. Within this framework, the overuse of natural resources is seen, on one hand, as the consequence of a lack of well- defined property rights as a result of which (renewable and non-renewable) resources become readily available too cheaply to its current users. Hardin called this problem “the tragedy of the commons: ‘Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons. Freedom in a commons brings ruin to all.
Pollution of the environment, on the other hand, is understood as occurring because the economic agents who undertake activities of production and consumption enjoy a complete lack of liability to third parties who suffer the environmental damages imposed upon them.
According to Pearce and Turner (1990) “this situation is regarded as one of externalities, a corollary of which is that the “social” and “private” costs of an economic activity can be quite different from each other”.
Neoclassical theory states that environmental degradation will translate itself into a loss of efficiency. The argument is that both “rapid” extraction rates and “externalities” will inevitably bring about a departure from optimum allocation of resources (the so-called Pareto efficiency). To restore efficiency, the theory seeks, first, to determine the “optimal” rate of the use of natural resources-the rate that will maximize the social collective return (and in a dynamic state this will be expressed in present value).
Secondly, in the case of externalities, the theory dictates the internalization of environmental costs through balancing economic gains with the environmental costs accrued from undertaking economic activities. Two solutions are proposed to restore efficiency. The first, known as the Coasian theorem, advocates the introduction of Studies in Political Economy appropriate property rights. When property rights are clearly defined, compensations change hands according to which party holds the natural resource, ensuring an efficient degree of economic activity.
The second solution proposes introducing a regulatory agency that can initiate corrective measures designed to achieve optimality by either prohibiting/reducing environmentally damaging activities through the setting of standards and quotas (known as command-and-control approaches), or by designing incentive-based mechanisms, such as pollution taxes or emissions-trading regimes. It is self-evident that for implementing and enforcing both sets of mechanisms for restoring efficiency, the existence of a social guardian/government that works selflessly needs to be assumed a priori.
Neoclassical theory acknowledges the difficulty of making such an assumption; either such a body may simply not exist (as in the case of environmental problems of global scale, such as ozone depletion), or central/local governments may simply “fail.”
The solutions offered, under the assumption that governments do exist and are immune to failures, are of course contingent on measuring the value assigned to environmental goods. According to Mulhearn (2012) “the theory assumes that individuals assign values to the environment (with the distinction among “use,” “altruistic,” “bequest,” and “existence” values) and that underlying these values are exogenously given individual preferences”.
Since markets do not exist for environmental goods and services, the theory calls for the estimation of their values.
One of the techniques most used is the so- called “contingent valuation” method, according to which individuals who are considered “relevant” are asked to reveal their maximum willingness to pay for a project that will improve the quality of a specific environmental good (say, cleaning up a river), or their minimum willingness to accept a project that will lower the environmental quality of a specific good (say, the pollution of a river).
Neoclassical theory acknowledges the existence of a justice (equity) problem that reveals itself in the relative positions of perpetrators and victims, and which can assume either an intragenerational or an intergenerational aspect, depending on whether or not perpetrators and victims live in the same span of time. When the justice issue is raised, however, conventional theory either bypasses it on the grounds that the theory itself is value-free whereas the justice issue is by definition value-laden, or refers to the field of public choice that investigates problems associated with aggregating individual preferences (regarding different states of distributional justice) in order to come up with a social one.
Let us, by explicitly referring to the three-dimensionality yardstick described in the introduction, reiterate the theory’s position vis-à-vis environmental issues.
Regarding the first dimension, environmental degradation is defined through glimpses of separate, autonomous individuals, each of whom is assumed to have an ordering of goods and services, including those pertaining to the environment. The value of a specific environmental good is determined by aggregating the valuations of all concerned individuals. Should the value of the environmental good in question turn out to be greater than the economic value-added that can be obtained at the cost of destroying/using the environmental good in question, then the theory labels it degradation.
The theory, secondly, offers the lack of markets for environmental goods and services as the economic cause of environmental degradation. Finally, regarding the third dimension, the theory proposes, first, to discover through a set of valuation techniques the values individuals assign to environmental goods in order to compare economic profits with their accompanying environmental costs, and, secondly-once the appropriate efficient level of environmental protection is identified-to achieve this level of optimality via a set of mechanisms (command- and-control or incentive-based).
A key assumption of the neoclassical approach is the view that natural capital and created capital are perfect substitutes. Natural capital can be defined as all renewable and no-renewable resources such as fossil fuels, plant species and forestry. Manufactured capital, also referred to as man-made capital or created capital comprises of all products be it machines or tools used in the economic process. This form of capital can be generated from natural capital, manufactured capital or a combination of the two. Both forms of capital comprise the total capital stock.
Technology possesses an important role for neoclassical theory. Technology can be defined as the manner in which inputs are used to generate outputs. Therefore technological innovations are the constant generation of outputs using fewer inputs. The assumption of perfect substitutability between forms of capital eradicates the problem of resource availability within an economy. Technology is said to have no limitations to the improving of scarcity within natural resources.
The neoclassical view of the environment is strictly anthropogenic. Valuing the environment is done on the bases of the utility gained. The broader ecological role of natural resources is not considered in its economic value. It is the view of neoclassical economic theories that conventional national accounting calculations such as gross domestic product (GDP), reveal the wealth of a nation. These national economic accounts record monetary flows and transactions within the economy but also signal human well being or development. The contribution of nature to the production process is ignored in these calculations. Therefore sustainability is in essence seen by neoclassical economists as a problem of managing the national portfolio of capital, maintain it at a fixed level.
Economics as applied to environmental issues can then be characterised by the application of mainstream neoclassical theory to the environment. The emphasis is on identifying circumstances in which the market is likely to fail in its task of allocating resources efficiently between different uses and in designing policies to enable the government to intervene to ‘correct’ the market failure.
Stern (2007) states that, “at the heart of the neoclassical approach to environmental economics is the aim to turn the environment into a commodity which can be analysed like any other commodity”. The preliminary exercise is to break down the environment into its constituent goods and services. For example, wetlands provide a range of goods (such as fish, water, wood) and services (water filtration, water transport, climatic regulation). Once defined in commodity terms, the environment can be brought into the market economy by constructing supply and demand curves for environmental goods and services and inputting market prices.
Hanley (2007) states that, “the level of environmental protection that is considered ‘optimal’ depends on consumer wants (demands) and the supply costs (costs of protection and opportunity costs)”. Environmental valuation methods are an essential tool of the environmental economist. They may be used to construct hypothetical demand curves for environmental goods and services when there are no markets for these resources.
The neo-classical theory of the environment and its underlying assumptions is feasible such that, most of the basic theories developed in neo-classical economics begin with the model of perfect competition. The assumptions upon which this theory is based are usually taken as a starting point. Economists know that we do not pretend to live in a world of perfect competition. However, the assumption of perfect competition allows us to identify important aspects of economic behaviour as well as the economic outcome of such behaviour. It helps reveal key economic relationships that might otherwise remain obscure. Once we understand what occurs under perfect competition we can begin to relax some of the model’s assumptions and observe the effects.
In summary, economists became aware that, for economic growth to be indefinitely sustainable, the economic system needs to take into account the uses of the environment that we have already mentioned, so that natural resources are not depleted and so that the environment is not overused as a waste sink. Environmental economists view the environment as a form of natural capital which performs life support, amenity, and other functions that cannot be supplied by man-made capital. This stock of natural capital includes natural resources plus ecological systems, land, biodiversity, and other attributes.
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Pearce, D. W. and Turner, R. K. (1990). Economics of Natural Resources and the Environment, New York.
Stern N (2007) The Economics of Climate Change: The Stern Review. Cambridge
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