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Conceptual Issues

Environmental Economics

The term environment has been defined as the conditions, circumstances and influences, under which an organism or system exists. It may be affected by physical, chemical or biological factors – both natural and man-made. It is used to refer to the circumstances in which man lives.

In Economics, the environment is viewed as a composite asset that provides a variety of services. It provides the economy with raw materials, which are transformed into consumer products by the production process, and the energy which causes this transformation. The raw materials and the energy will ultimately return to the environment as waste product.

Environmental economics also concerns itself with the manner in which the environment provides services, either directly or indirectly, to consumers. For example the air we breathe, the nourishment we receive from food and drink and the protection we get from shelter and clothes, being all the benefits we receive from the environments.

Economics considers the environment as a form of social capital which society must somehow manage, if it is to maximise its welfare.

Property Rights
The manner in which producers and consumers use environmental resources depend on property rights governing those resources.

In economics, property rights refer to a bundle of entitlements defining the owners’ rights, privileges and limitations guiding the use of resources.

Market Failure

The underlying rationale of Environmental Economics is market failure. The operation of the free market forces do not always achieve the most efficient allocation of resources, perhaps because of the existence of monopolies and imperfect information among consumers.

Externalities and public goods are two main factors responsible for market  failure. The market can achieve efficient resource allocation only to private goods for which private property rights are established, so that only those who are assigned rights are established, while others are obliged to pay for the use of them.

When private actions result in negative externalities such as the pollution of air or water, and the working of the market fail to handle it efficiently, we talk of market failure.

Similarly, government failure can arise, not only from misuse of budget but also from undue regulation, to bias resource allocation and poor enforcement of such regulations.

Externalities or Spillovers

Externalities or spillovers are said to exist when an activity of an economic agent meets two interrelated conditions of:

a. Production or consumption affecting the production or utility levels of other producers or consumers.

b. The effect in (a) above is both unpriced and uncompensated. The satisfaction of these two conditions implies interdependence in (a) and unpriceness or absence of compensation. It is possible for interdependence to exist while the effect is priced. In this case the effect is internalised. Spillovers or externalities are either beneficial (economics) or detrimental (diseconomics). Examples of spillover benefits include the provision of security in a street in Port Harcourt or the provision of street lights along Rumuibekwe road in Port Harcourt by an organisation.

Diseconomics on the other hand include smoke, pollution of a neighborhood by a manufacturing company, pollution of rivers, etc., without compensating; the environment suffers from the effect.

Externalities are attributable to either the lack of property right or their non-enforcement. For instance, the absence of property rights over air space or water ways make it possible for people and organisations to use the resources as free goods. In Lagos, Port-Harcourt and other big cities in the country, industries (firms) pollute the environment because it belongs to nobody. The donor (offending) party feels free to pollute the river or air while the recipient or (offended) party is offended by an infringement on his right to clean air. In the above case, the government intervenes to ensure a safer and cleaner environment. This is the rationale for the establishment of the Federal Environmental Protection Agency (FEPA) by the Nigerian government.

Public Goods

A pure public good has one or both of the following characteristics:

1. Non-rivalry in consumption: For instance Mr. A’s consumption of the good does not reduce or interfere with Mr. B’s consumption of the same good. If the Port Harcourt Municipal Government sets up a smog control system, Mr. A. benefits from breathing good air. But this does not interfere with the same benefit being enjoyed by Mr. B. and all other residents of the municipality.

2. Non-excludability from consumption: In private markets, those who will not pay the price do not get the product. But in our smog-control example, no one in the municipality can be prevented from enjoying the benefits. So if one tries to finance this service on a price basis, the attempt would surely fail. No one would pay the price because he could continue to enjoy the service without paying if the good is produced at all. It must be financed from tax revenue. Examples of a pure public good are not as common as one might think. National defence is a better example. But for most other kinds of government output: education, highway services even police and fire protection exists, – a price could be charged. If we decide not to price these services, this is for reasons of policy rating them a technical necessity.


Pollution is a process of making something dirty or rendering it impure, especially by adding harmful or unpleasant substances to it. In Economics, polluting of the environment takes several forms.

a. Air Pollution – This is the discharge of obnoxious gases and solid particles into the atmosphere, leading to smog conditions in many metropolitan areas. Automobiles and trucks are the main sources of this problem; and also utility generating plants, steel mills, chemical factories, paper mills and other manufacturing establishments contribute to it.

b. Water Pollution – This arises from discharge of organic and inorganic wastes into streams and lakes. This discharge comes mainly from industrial establishments, while discharge of inadequately treated sewage from municipal sewage systems is also an important part of the problem.

c. Acclimatisation of Solid Waste – The automobile junk-yard in most cities in Nigeria is the most conspicuous example. Also in Nigeria, every day, consumers discard hundreds of millions of tons of cans, bottles and other trash from the drinking of ‘pure water’, etc. This forms a growing problem for city waste disposal system.

d. Noise Pollution – A level of background noise which can range from mildly pleasant to deafening levels. The air plane jet engine has been in the forefront of attention. But in urban areas, the noise of motor traffic, construction activity, industrial machinery, transistor radios, and other things make it increasingly hard for those who prefer quietness to satisfy this preference.

Natural Resource as Input in Production: Renewable and Non-renewable Resources and Their Impact on the Environment

In addition to man-made machines and other equipment, natural resources are also important inputs in many production processes. For purposes of analysis, it is common to position natural resources into two distinct categories:

a. Renewable Resources: These are resources that can be replenished when used. For example, the economic issues that can arise in connection with renewable resources as inputs in production can be illustrated when we consider the case of a lumber company whose business it is to produce lumber from trees grown on its own land. The company can plant, care for and harvest trees; and then replant the trees as a form of replacement of the one used. Renewable resources such as trees in this case serve as inputs in the lumber industry.

b. Non-Renewable or Exhaustible Resources: These are resources that exist in finite quantities and cannot be replaced once expended. A common example of a non-renewable or exhaustible resource is petroleum oil, gold, titanium and aluminium, etc. These cannot be replenished by people. Once the earth’s initial stock of these substances runs out, we will have to do the best we can without them.

The issue of how competitive market allocates renewable and non-renewable resources are considered in advanced environmental economics.

The impact of renewable resources like trees on the environment is that excessive logging by lumber companies, the cutting down of trees by individuals to be used as fuel, wood, for domestic cooking in both urban and more in the rural areas of Nigeria without replacement is causing serious environmental problem. Such things as deforestation and overgrazing by cattle rearers have also caused serious desertification. While the impact of non-renewable resources like oil produced by oil firms has caused negative externalities emanating from the exploitation and use of mineral resources, such as oil spillage, vulcanisation, explosion and their attendant
consequences (air and water pollution, fire outbreak, destruction of cultivable pieces of land).

In summary, when natural resources are used as inputs in many production processes, both renewable and non-renewable; environmental degradation takes place, and when the activities of human beings adversely affect the natural resource
base and ecological environment it is known as environmental problem. Such environmental problems include deforestation, erosion, water resource depletion, air and water pollution and climate change. All of these have combined to stagnate food production, increase in consumption of environmentally harmful energies, stall development and perpetuate poverty.

The Kyoto Protocol

The increasing concerns about the extent of global warming and its potential consequences culminated in the United Nations framework convention on climate change (UNFCCC) which was adopted in 1992. It was amended in December 1997 in Japan, with an additional legally binding commitment now called the protocol. The protocol commits government of the Developing Countries (DCS) for the first time to legally binding obligations on issues relating to world environmental protection from the mildly unpleasant, to deafening.