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Several of these interactions are examined here. Others are examined in other lectures. The bottom line is that there is no simple relationship between development and the environment. The impact of economic development on the environment can vary from one country to another, vary over time within a country, and vary depending on the economic sector and environmental issue in question. In economic terms, a win-win situation occurs when the marginal social cost of environmental protection is negative. In other words, when protecting the environment reduces social costs rather than increasing them. The diagram below illustrates this situation:
In this diagram, there is a region where the marginal social cost (MSC) curve lies below the horizontal axis. Over this region, improving the environment reduces social costs. There is another region where the MSC curve is above the horizontal axis but still below the marginal social benefit (MSB) curve. Within this region, environmental protection is not win-win but is still socially desirable because marginal social benefits outweigh marginal social costs. Beyond the point where the MSB and MSC curves intersect, additional environmental protection is not socially desirable because marginal social costs exceed marginal social benefits. Reforming these policies could building positive links between the economy and the environment by improving both economic performance and environmental quality. However, attempting to reform these policies can run into strong opposition from politically influential interest groups who benefit from government subsidies. Attempts at reform can also be undercut by corrupt politicians and bureaucrats. Agricultural Input Policies in India. A good example of how government policy can distort incentives for environmentally and economically sound resource use is the government of India's policies toward irrigation and fertilizer use in agriculture. Irrigated area in India has quadrupled in the last 50 years. Government-run canals have consistently accounted for 35-40% of total irrigated area. Farmers in the head reaches of a canal project generally apply more irrigations to all crops than the optimum number of irrigations required, leaving too little water for downstream farmers. The principal reason for this is that canal water rates are usually linked to area rather than to the volume used, so that the cost of using additional water on a given area is zero. Linking rates to area rather than volume used does reduce administrative costs, since it's easier to figure out how much land a farmer has than how much water is being used, but these savings are at least partially offset by distortions in incentives to use water. Canal water charges at present tend to be very low and not revised periodically. For example, in some states, water rates for canal irrigation have not been revised since the early 1970s. As a consequence, collections in inflation-adjusted terms have dropped over time and have not kept pace with operating and maintenance costs, to say nothing of the capital costs of canal irrigation projects. According to a 1992 government report, total receipts from irrigation charges cover only about one-eighth of the total cost of irrigation projects. Costs for canal projects tend to be inflated by corruption on a grand scale. It has been estimated that 25-50% of the budget on a typical canal project leaks out in kickbacks to politicians and irrigation officials. Wells have their own problems. Overexploitation of groundwater sources appears to be an increasingly serious problem, particularly in northwest India. Encouraging responsible groundwater use is hampered by significant government subsidies on electricity. The link here between groundwater and electricity is that most pumps used to extract groundwater are electric powered. In many states, a farmer hooking up an electric pump to a well pays a nominal one-time charge and then nothing thereafter, regardless of the amount of electricity used. Irrigation can entail significant environmental costs. A typical dam built as part of a canal irrigation project may displace thousands of people and submerge a great deal of forestland and productive agricultural land. Irrigation can lead to salinization and waterlogging problems. Canals in India are well known for their inefficiency, as measured by the low percentage of water that actually reaches farm fields. Areas with canals tend to be flat and poorly drained, causing most of the water to be lost in seepage or conveyance. Seepage from the canal itself or from farmers' fields can cause the sub-soil water table to rise to the root zone of crops, where it then causes them to die. The problem can be compounded by salinization, which is the effervescence of harmful salts that a rising water table brings to the surface. With respect to fertilizer, the Indian government's fertilizer subsidy program was first introduced after the 1973 oil shock with the objective of encouraging the use of fertilizer in order to capture the maximum gains from the then recently-introduced green revolution seed varieties. Simultaneously, the other objectives of the program were to keep fertilizer imports down and achieve and to maintain a high degree of self-sufficiency in fertilizer production. Fertilizer imports, except those of potassic fertilizers (which are not manufactured in India), have indeed been kept low through import licensing schemes and high tariffs. Fertilizer subsidies remain high. Abolishing fertilizer subsidies remains controversial. Fears have been expressed that the abolition of price controls on fertilizer will lead to sharply higher prices and reduced fertilizer usage, thereby decreasing yields of food crops. Economic studies of Indian agriculture do not suggest cause for alarm. These studies suggest that while yields would fall if fertilizer subsidies were abolished, they would not fall by much. By reducing fertilizer usage, abolishing fertilizer subsidies would also reduce pressures on the Indian environment. Some of the nitrogen or phosphorous applied to farm fields can find its way to surface waters, where it can lead to excess nutrient enrichment and eutrophication. An increase in nitrogen or phosphorous levels can stimulate algae growth, and the resulting effects on the aquatic ecology can be dramatic. As algae blooms and subsequently die, it takes up dissolved oxygen, depleting the oxygen available for fish and other aquatic life. It can also block the sunlight needed by aquatic vegetation, causing the vegetation to die off. This loss in vegetation then moves up the food chain, leading the death of fish and other aquatic life. As producers, agricultural households can degrade resources and the environment when they cut down forests to make way for agricultural land. They degrade their own soil resources when farm in ways that worsen soil erosion or when their irrigation systems lead to salinization and waterlogging. They can threaten surrounding ecosystems through the use of pesticides. In all of these cases, both as producers and as consumers, households can make investments that have the potential to both protect the environment and improve their own long-term well being. In other words, both the household itself and the environment can be winners. Some potential win-win investments can include:
The key characteristics of any investment are that there's an up-front cost and that returns aren't realized until the future – it could take many years. So, in the examples above, a household making an investment has to bear a cost right now in exchange for future income or well being. Is it willing and able to make this tradeoff? In many cases poor households would be willing to make this tradeoff if only they could get a loan to finance the investment. However, because they're poor and lack collateral, no one is willing to give them a loan. The result is that a lot of win-win opportunities are foregone. The result can also be a "cycle of poverty and environmental degradation" that can only be broken from outside the household. Furthermore, poor households tend be more averse to risk than wealthier households. If one of a wealthy household's investments flops, the result is a disappointing bottom line. If a poor household's investment doesn't pan out, the result could be starvation or severe malnutrition. The result is that additional potential win-win opportunities are foregone. This can be seen in the diagram above. Making win-win investments will carry us to the point where the MSC curve intersects the horizontal axis. However, the socially optimal point is where the MSC and MSB curves intersect each other. Thus, in general, win-win activities alone will not ensure a socially optimal level of environmental quality. To ensure the socially optimal level environmental quality, strong policies and institutions targeted at specific environmental problems are needed. This can be challenging because developing countries often lack the monitoring and enforcement capacity to effectively carry out any policies that are adopted. Government environmental agencies may also not be given the budgets needed to carry out their mandates. Environmental policies invariably run into vested interests, and overcoming these interests in a society where corruption is widespread can be very hard. It is necessary to build constituencies for environmental change that can withstand competing interests.
In this diagram, environmental degradation worsens as per capita income increases until we reach a turning point, after which the situation gets better. Is this hypothesis correct? Statistical analyses of data from developing countries suggest that the hypothesis is appropriate for some environmental problems but not others. Some types of environmental problems get better almost uniformly throughout the course of economic growth – lack of access to safe water and sanitation, for example. For them, the pattern looks like this:
Others get almost uniformly worse, or at least they've gotten worse so far – greenhouse gas emissions per capita, for example. Whether they'll eventually get better remains to be seen. For these problems, we tend to observe a pattern like the following:
However, many other environmental problems do appear to follow the environmental Kuznets curve. Atmospheric concentrations of urban air pollutants and concentrations of several pollutants in rivers, lakes, etc. appear to follow an inverted U relationship with per capita income. Rates of deforestation, the fraction of fish species listed as threatened, and municipal wastes per urban resident also fit the inverted U pattern. The turning point where increases in income lead to environmental improvements rather than additional degradation varies, depending on the environmental problem and country in question. In general, however, most turning points appear to lie in the range of $2,000 to $10,000 in per capita income, in U.S. dollars. Why an Environmental Kuznets Curve? Why is there an environmental Kuznets curve for many types of pollution? Basically, there are two competing forces at work during the course of economic growth, one of which dominates at low per capita incomes (below the turning point discussed above), and the other of which dominates beyond the turning point. On the one hand, as per capita income increases, people consume more goods and services. For people in low-income countries, this primarily means more manufactured goods. As people consume more manufactured goods, production of manufactured goods increases. The result is that the environmentally harmful byproducts of manufacturing – air pollution, water pollution, solid wastes, hazardous wastes, etc. – also increase. Furthermore, many manufactured goods such as automobiles also generate pollution in the process of being used. In effect, people have a "derived demand" for pollution. It's "derived" in the sense that it comes from the demand for goods and services that generate pollution in the process of being produced or being consumed. We don't like pollution, but we do like goods and services that yield pollution as a byproduct. On the other hand, environmental quality tends to be a superior good – as per capita income increases, the social demand for environmental quality increases more than proportionally. This social demand for environmental quality manifests itself in environmental policies and regulations. What the environmental Kuznets curve appears to be telling us is that the derived demand for pollution dominates at low per capita incomes. Beyond the turning point, the social demand for environmental quality dominates. It's important to recognize that the environmental Kuznets curve doesn't just happen. Improvements in environmental quality in most cases require countries to adopt, implement and enforce environmental policies. There's nothing automatic about this process. The process is almost always characterized by bitter conflicts. At the same time, there's nothing inevitable about the environmental Kuznets curve. Nothing says that a country is consigned to more pollution in the early stages of economic development. Countries can make policy choices that flatten out the inverted U, or allow them to "tunnel" through the environmental Kuznets curve. A recent study found that countries with higher levels of literacy and political rights had significantly lower levels of several types of pollution, controlling for per capita income. This may be because literacy and political rights make it easier to build effective coalitions in favor of protecting the environment.
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