bangladesh has made some noteworthy progress in the matter of economic

8/3/2019 Bangladesh Has Made Some Noteworthy Progress in the Matter of Economic

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Bangladesh has made some noteworthy progress in the matter of economicgrowth and poverty reduction since the early 1980s. In 2005-2006 GDP growthreached 6.6 percent from an average of 3.8 percent per annum in the 1980s. Duringthis period, the share of population below poverty line has fallen from 62.6 percent in1983-84 to 44.3 percent in 2000.

Economic theory provides rationale for government expenditure; correctingmarket failure and improving are the two primary ones. When a market economy failsto allocate resource efficiently, market failure occurs. One such example is the case ofexternalities. Government can curb negative externalities (for example, pollution)and promote positive externalities (for example, education and health) by means ofregulation, taxation and subsidy, and public provision. Hence, the justification ofgovernment provision of pure public good is clear.PovertyPoverty reduction considerations may also lead the government to provideprivate goods- those which are disproportionately consumed by the poor throughtransferring resources to a targeted group of people who are unable to make

provisions by themselves due to market failure. Theoretically, a market basedeconomy can distribute income in a socially unacceptable ways, and in these cases thegovernment often feels obligated to protect the poorest vulnerable segment of thesociety through interventions. Food and housing services are some of the main antipovertyprogram. But none or very few society has managed to reduce povertythrough direct welfare transfers alone. Education and health expenditures which helpreduce human poverty and increases employability and productivity are indirect butmore sustained way of reducing poverty.

The second set of cause and effect takes us to the issue of shrimp management policy. Thespecific structural adjustment policies here involve promotion of non-traditional exports andprivatisation. Availability of cheap labour and supply of a product of nature helped shrimpproducers and exporters to benefit from market opportunities outside. Shrimp culture in thecoastal region of Bangladesh has resulted in many negative environmental consequences.One of them is increased salinity of soil and the another is loss in biodiversity (resulting fromshrimp seed collection and throwing away of by-catches).

As pointed out by Ahmed (1995), the changes in preliberalisation practices in agricultural

markets have been quite substantial in Bangladesh as compared to some other South Asiancountries. Besides impressive improvement in macroeconomic indicators (Bhattacharya andTitumir 1998b; Zohir 1997), subsidies in food and fertilisers had been drastically reduced.The gap between domestic and world prices of rice declined sharply and Bangladesh was ableto abolish the rationing system. Opening of import and export of foodgrains to private sectorwas completed. Bangladesh was able to transform the domestic and external trades in5fertiliser from a strong public monopoly to a healthy competitive structure. Table 1 presentsthe selected indicators of liberalisation and their change over time in Bangladesh. This Tablehas been adapted from Table 1 of Ahmed (1995).

It should be noted that there are direct and indirect impacts of SAP as long as fertiliser policy


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is concerned. Direct impact relates to changes brought to the use of fertiliser whereas indirectimpact relates to use of budgetary savings. In the literature the direct impact of SAP is only6studied. Table 2 draws the timeline for the process of the liberalisation in the fertiliser marketin Bangladesh. This Table is an extended version of Ahmed (1998)s Table 3.1.

5. SHRIMP MANAGEMENT POLICY AND ENVIRONMENT

Before the extensive shrimp culture practices that exist today traditional bheri/gheraquaculture was practiced in the coastal belt of Bangladesh. In 1950 more than 100 farmswere involved in shrimp farming through trapping and rearing wild shrimp fries that camewith tidal wave. The coastal embankment project of the sixties eroded this practice and madethese lands suitable for rice cultivation. In the seventies the farmers began to produce shrimpsin the polders in response to strong demand for shrimps in the international market. At thesame time production of rice became unprofitable due to water-logging that resulted frompoor drainage. This triggered off the boom in shrimp culture and its adverse impact on theenvironment followed. Thus both internal (historical existence of shrimp farming in a smallscale, production of rice turning unprofitable and the like) and external (favourableconditions in the international market, promotion of non-traditional exports, privatisation andso on) factors influenced the boom in the production of shrimps in Bangladesh. Shrimpfarming gathered momentum during the transition from a more inward looking developmentstrategy characterised by high degree of regulation and control on international trade to astrategy that promoted investment in export-oriented activities by private agents.The following incentives were given to the shrimp sector in the process of pursuing anexport-led growth strategy:- zero tariff access of imports- fiscal incentives for exports

- income tax rebate13- speedy customs clearance- cheap credit- leasing of private and khas land in favourable terms- institutional support for setting up downstream factoriesShrimps now account for about 9 per cent of total national exports (Talukder 1999) and thissector grew at rate of around 9 per annum during the last decade (Bhattacharya et al. 1999).However, we do not ha ve reliable estimate of total employment of labour force in this sector.But existing figures show that exports, catch and the number of ghers have been increasingand given the fact that shrimp cultivation is extensive in nature we can expect employment to

have decreased in this sector (Toufique and Hasan 1998). It should be noted that a largeproportion of the labour force in the shrimp processing sector is women.

Evidence on Environmental Degradation due to Shrimp CultureAs rightly observed by Bhattacha rya et al. (1999), existing literature mainly includeperception and case studies on socio-economic, politico-economical and a bit onenvironmental consequences of shrimp farming. Literature on scientific study of the impactof environment is scant and of limited coverage. Existing literature reflects three views:pessimistic, optimistic and a reformist view:

Pessimistic view: shrimp culture is unsustainable because the negative externalities aresystematic, endemic and irreversible. Therefore the culture of shrimp has to be banned.Optimistic view: shrimp generates income, employment and foreign exchange and their

benefits outweigh the associated costs.Reformist view: there are negative environmental externalities but they can be taken care of


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through policy intervention. This is a moderate view trying to minimise the concerns raisedby the first view and maximise the benefits expressed in the second view.Here are the findings of some secondary studies:- Manju 1996 applied a before-after approach to identify what might be called forcedlivelihood diversification. In village Chalbunia, the percentage of population belonging to

the category of rice-cultivators decreased from 33% to 13% while corresponding percentagefor those involved in shrimp-cultivation increased from 20% to 32%.14- Manju 1996 found income loss for the peasant households due to shrimp culture. Incomelosses occurred from decline in rice productivity, loss of poultry and livestock and erosion ofhomestead vegetation and social forestry. Manju (1996) found that post-shrimp income levelof local peasant households was only 62% of the pre-shrimp level.- Adnan (1991), by applying a with-without approach, found loss in vegetation andlivestock: Half of jackfruit and mango trees were destroyed and one-third of cattle headsdisappeared in the shrimp polders during 1987-90.- A scientific study sponsored by Nijera Kori (1996) found increase salinity and soildegradation and vegetation loss.The actions mentioned in the literature, their consequences for development and their impacton the environment and interventions recommended have been summarised by Bhattacharyaet al. (1999) in Table 3.

Economic Costs and BenefitsBhattacharya et al. (1999) makes an attempt to incorporate environmental costs in measuringthe economic costs and benefits of shrimp cultivation. There are direct (land degradation,health hazards and mangrove destruction and so on) and indirect (loss in biodiversity, socialimpact and so on) costs of shrimp cultivation. These costs are not always immediate andtherefore spread over time. It has been found that the benefit (measured by the foreignexchange earnings from shrimp exports) of shrimp cultivation well exceeds the costs of

shrimp cultivation. To be precise, the environmental costs of shrimp cultivation would be inthe range of 21-30% of total benefits. Some limitations of this study have been made explicit:only on-site costs of shrimp culture were considered and some broad assumptions were madeand findings from other countries had to be considered.Note that the estimates by Bhattacharya et al. (1999) are based on macro aggregates. Farmlevel study was not done to estimate environmental costs. Talukder (1999) on the other handestimated the financial costs and benefits of shrimp culture at the farm level and underdifferent farming systems but he ignored all environmental costs. He has found that thebenefits of shrimp culture far exceeds its cost. We can now look into his estimates bytransplanting environment costs almost in a surgical way. Assuming that such cost could beas high as 30% of the benefits from shrimp culture we have included the environment cost of

shrimp culture at the farm level by multiplying the value of catch by .30. The results arepresented in Table 4, Table 5 and Table 6.Table 4: Annual Profitability of shrimp-rice farming

As can be seen from these Tables that net returns, after taking into account environmentalcosts into considerations, from shrimp farming are still positive and it seems that shrimpculture is still a profitable activity under all farming systems. The rate of return declines dueto incorporation of the environmental costs but it is still greater than unity. On the other handthe net returns also decline but they are still positive when environmental costs are

incorporated in the calculation. The strong policy conclusions that can be drawn from thisexercise is that the gher owners can be taxed by an amount which (as a percentage of the


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value of catch) can lie between the numbers in g and f, i. e., the tax rate can lie between therates of return when environmental costs are nottaken into consideration and when theenvironmental costs are taken into consideration. However, the tax rates should adequatelymaintain the incentives for investing in shrimp farming. The tax revenue thereby collected18

can then be spent on those who suffered from environmental degradation in one way or theother. This is the classic tax-subsidy solution for internalising externalities of environmentaldegradation. The only problem of pursuing such policy is measurement and implementation(political contestation).

The Response of the World BankThe effects of shrimp cultivation on the environment, as the analysis of the previous sectionsuggests, have been fairly well documented, at least in qualitative terms. In the near absenceof quantitative estimates, opinion may vary on the extent of the impact but in general mostwill agree that it is a serious ma tter of concern. However, looking through the World Bankdocuments, one can find that such concern was missing initially. The environmental impactof shrimp culture was gradually recognised by the World Bank, not possibly because new

quantitative findings based on fancy models started to come up but possibly because by thattime public concern on the environmental impact of shrimp cultivation was gettingincreasingly binding. The NGOs played a strong role in this regard. In this section we willfocus on World Banks changing views on environmental degradation due to shrimp culturein the coastal region of Bangladesh.The changing perception of the World Bank can be best depicted by evaluating its experiencewith the shrimp culture project and its plan regarding the Fourth Fisheries Project. Approvedin 1986, the total cost of the shrimp culture project was US$36.7 million. The project aimedat intensifying the production of brakish water shrimp in the coastal areas through theintroduction of improved water management and related shrimp culture practices. It alsoaimed at generating foreign exchange earnings and increasing incomes and economicactivities in the coastal areas. The project expected to strengthen fisheries administration andextension services, initiate procedures for controlled salt water intake in polder areas for thepurpose of shrimp culture, modify land lease policies, improve capacity utilisation of theshrimp processing industry and improve marketing of shrimp. It was evaluated that theproject was largely successful in achieving the objectives. The report has the following toinform about its environmental impact (World Bank 1994, p. 10):there are no environmental effects caused by the projects. The land use pattern and the

ecological balance have not changed as a result of project interventions. On the contrary,

some of the diverse effects which existed under pre-project conditions, such as water-logging

and uncontrolled cuts in embankments for the constellation of sub-standard inlet structures,

have been minimized or eliminated by the project interventions. No mangrove forest has been

destroyed as a result of the projectNote that this is a finding based on the report provided by a local consultant hired by theWorld Bank. The World Bank report does not question these findings or any limitationsinvolved in generating these findings. Unless we have access to the report prepared by thelocal consultant we cannot go any further rather than endorsing the World Bank view. Whatbecomes clear is that the World Bank commissioned a project component for studying theimpact of the project intervention on the environment. This endorses the importance ofenvironmental issues that was cropping up and gradually getting prominence. But,unfortunately, the entire report has nothing much to say on the environment than what hasbeen quoted above.Also, the project admitted of learning the lesson that the NGOs role in organizing and

motivating shrimp farmers facilitated the achievement of project objectives (p. 13). This ispossibly the initial stage of World Banks growing concern on involving the local people in


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development efforts.Getting back to the issue of environment some questions can be raised. The length of theproject was shortfive years and in the initial years it was delayed and hampered by landtenure conflicts. The report admitted that a longer implementation period would have beenmore appropriate. Thus, we can assume that not enough evidence was available for the study

on environment impact assessment. This is important because many environmental costs areunevenly spread over time and may show up after a long gestation period. Thus we wouldtake the above conclusion about the environmental impact assessment of the project withcaution. This is exactly what is missing in the World Bank report.A BIDS evaluation of the same project does not endorse the view expressed in this report.Rahman and Azad (1995, p. 37) makes the following point:the traditional shrimp culture even though did not affect environment in Coxs Bazaar, there

have been a number of negative environmental consequences of it in Khulna region

especially in non-project areas. However, a part of the project area in Khulna (e.g.

Hanirabad and Munkia in polder 20) was also affected, mainly because of the presence of an

20outsider leaseholder who, due to unplanned culture, created some problems, such as harvest

was prolonged and it affected transplantation of Aman crops. The planned activities of the

project were also obstructed by him for which the environmental condition of the area further

deteriorated. The project could do nothing as he managed to take long-term lease from the

beginning of the project

Thus there is an explicit inconsistency between World Banks evaluation ofthe impact of theproject on environment and BIDS evaluation of the environmental impact of the sameproject. Let us leave the matter here and see World Banks strategy for the Fourth FisheriesProject as long as shrimp culture is concerned.The project appraisal document for the Fourth Fisheries Project (World Bank 1999) reflectsthe shift in World Bank view not only on the impact of shrimp culture on environment butalso on its impact on more pressing social issues. The document admitted that the expansion

of shrimp farming has raised important issues regarding land and water use in the coastalareas. (p. 4). One important issue mentioned in the document relates to land use conflictswhere the poor social groups are the losers (p. 4):The contrasting demands of rice farmers and those involved in shrimp farming have

generated frequent conflicts in which poorer social groups in shrimp farming areas have

often been the losers

Some environmental aspects of shrimp cultivation and its adverse impact on the local peoplehave also been explicitly mentioned in the document (p. 4):Unplanned shrimp farming development has led to degradation of agricultural land and

negatively affected the livelihoods of local people

Thus land degradation due to shrimp cultivation has been admitted by the World Bank so is

the adverse impact of shrimp cultivation on the local population. The project appraisaldocument also admitted of the outbreak of fish diseases (p. 4):outbreak of diseases, particularly White Spot may continue to threaten the shrimp culture

The adverse impact of biodiversity brought about by collection of wild shrimp fry has alsobeen recognised (pp. 4-5),

CONCLUSION

This report has made an attempt to improve our understanding of the impact of SAP on theenvironment in Bangladesh. It is entirely a desk-review based work. We scanned throughWorld Bank documents and other relevant literature that directly or indirectly dealt withsimilar issues. By construction, this is not an exercise in environment impact assessment. The

various meetings of the SAPRI consultative process have generated a picture that shows howSAP policies were thought to have affected the environment. This report found sufficient


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evidence in the existing literature to support the explana tion that came out from theconsultative process.23We have seen that the pressure to increase food production has resulted in adopting policiessuch as excessive emphasis on (rapidly) increasing yield, withdrawal of subsidy and

liberalisation of imports. Adherence to these policies has generally resulted in excessive useof fertilisers, use of spurious fertilisers and inefficient use of various type of fertilisers. Thesehad serious impact on the quality of land: nutrient content in soil declined and fertility of landeroded. This took us to the issue of fertiliser policy.We have also seen that the objective of pursuing an export-led growth strategy has led toadoption of policies such as promotion of non-traditional exports, for example, shrimps.Privatisation was promoted to boost up exports. In the shrimp sector this resulted in rapidincrease in shrimp production. The negative effects or externalities of increasing shrimpproduction are loss in biodiversity and increasing salinity of soil. Of course, there are otherrelated environmental concerns but these came up clearly from the consultative exercise. Thistook us to the issue of shrimp management policy.Very few will disagree with the objectives of increasing food production and also of pursuingan export-led growth path in a globalised world. We have also provided available evidenceon the effects of SAP policies. Again, there can hardly be any dispute on that, however,controversy can arise on the extent of the effects. This is more due to numerical ignorancethan due lack of our interest in it. Serious quantitative study on environmental impactassessment is missing. Therefore we have looked at the inadequacy of the SAP policies morein qualitative terms.As long as the fertiliser policy is concerned we have seen some lapses in the existing policyand therefore there is a room for improvement in this policy. Reduction of subsidy onfertilisers have resulted in (i) improper mix in the use of fertilisers, and (ii) insufficient use offertilisers to compensate for nutrient losses. Therefore, the issue of fertiliser subsidy has to bereconsidered on the ground of efficiency, environment and equity. The issue is how do we

make up for land degradation and there are other policies that may work well as compared toreducing the use of fertilisers by removing subsidy. For example, encouraging farmers to useorganic fertilisers through NGOs or the governments agricultural extension networks.As long as shrimp cultivation is concerned we have seen the World Bank taking a morecautious approach, albeit gradually. Initially the environmental impact was either ignored or24considered to be of secondary importance. Gradually, particularly in the Fourth FisheriesProject, the Bank became environmentally cautious. A total ban on shrimp production willhave strong macroeconomic effects and at the same time an unbridled production of shrimpwill have serious environmental consequences. Existing evidence shows that shrimp cultureis highly profitable even when environmental costs are taken into consideration at the farm

level. Therefore there is nothing apparently wrong in increasing shrimp production as long asit is not done in an unplanned manner.Now the question is how the civil society can participate in the policy formulation process.This is already taking place in one form or the other. The NGOs are playing an important roleby serving in various committees of the government at various levels. These committees areformed either for formulating policies or for implementing them. The general approach of theNGOs has been those of generating awareness and promoting advocacy at the grassrootslevel. Advocacy and awareness work and World Banks attitude to environment somehowvindicates this. Such strategy helps to promote local resistance to environmental degradationand this is where the civil society should play a major role. The impact of environmental firstfalls on its victimsi. e. the local people. They are the one who can describe how it affects

their life and livelihoods and hence their voices have to be heard first. The problem is that thevictims are not homogenousthey are differentiated and therefore they have different


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capabilities to withstand environmental degradation. Of course, there are environmentalproblems which affects every body (arsenic contamination of ground water) in a negativeway whereas there are environmental problems that does not affect everybody in a negativewaythere are losers and gainers. Thus what is needed is a community response toenvironmental degradation and the civil society should work for that.

RECOMMENDATIONSFertiliser Policy1. The issue of fertiliser subsidy has to be reconsidered not only on the ground of efficiencyand equity but also in the context of its relation to environment.2. The imbalance in general subsidy levels has to be removed/reduced. Bangladesh nowsubsidises mainly nitrogen, so farmers over-apply it and under-apply phosphate, potassium25type of fertilisers. The latter is crucial for long run conservation of soil fertility and hence ithas to be subsidised more.3. A regulatory framework has to be designed and maintained for expected performance ofthe fertiliser market.

4. To halt the process of land degradation the farmers should be encouraged to use organicfertilisers. This can be done by the NGOs or by the governments agricultural extensionnetworks.

Shrimp Policy5. Shrimp production will have to be done in a planned manner (for example, zoning), not ina haphazard way.6. Existing laws relating to shrimp production has to be strictly enforced.

The Role of Government, Civil Society and the NGOs7. The NGOs and the civil society at large should promote local resistance to environmentaldegradation. Promoting community response towards the right direction can help to decreaseenvironmental degradation.

8. Substantive quantitative study on environmental impact assessment is required forformulating environmental policy.

Environmentaleconomicsis a subfield of economics that looks at environmental issues inrelation to economic development and sustainability. Environmental economics looks largelyat environmental policies in countries, and how they impact the local and global economies,either positively or negatively.

Why do we need environmental economics?

It makes sense to use economics in environmental policies due to the fast depletion of naturalresources, making the environment a scarce resource. Since economics is about how to dealwith scarce resources, it can often be useful when tackling environmental problems.
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One of the basis of environmental economics is to look at various causes ofmarket failure. A

market failure is said to have occurred when distortions prevent the price mechanism fromallocating resources efficiently, resulting in welfare loss. Ideally, environmental economicsviews a healthy market as functioning such that all resources are distributed in such a waythat society welfare is maximised. A cause of market failure is that positive and negativeexternalities are ignored.

Looking at the standard demand and supply diagram with pollution, an unregulated marketleads to equilibrium price and quantity determined at the intersection of the supply, ormarginal private cost (MPC) curve and the demand curve: P1, Q1.

Consumers and producers enjoy the gains from this equilibrium. Theconsumer surplusisshown by area abcd. The producer surplus is shown by area fgh.

Unfortunately, production of Q1 generates negative externalities such as fewer healthy days,fewer recreation opportunities. The full cost to society of production of Q is the marginalsocial cost curve: MSC = MPC + MEC. The external costs of Q1 is equal to the verticaldistance between MPC and MSC at Q1.

Environmental economics tries to highlight these failures so that nations can implementregulation to better steer the market. Environmental regulation is designed to get firms tointernalize the externality by considering the external costs of production. If firms face a
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constant pollution tax on each unit of output so that they face production costs equivalent tothe MSC curve then the new market equilibrium will be P2, Q2. The regulated productmarket will have a higher price and lower quantity.

Implications

If there is a negativeexternality, then social costs will be greater than private costs.Environmental pollution is an example of a social cost that is seldom borne completely by thepolluter, thereby creating a negative externality. If there is a positive externality, then onewill have higher social benefits than private benefits. For example, when a supplier ofeducational services indirectly benefits society as a whole but only receives payment for thedirect benefit received by the recipient of the education: the benefit to society of an educatedpopulace is a positive externality. In either case, economists refer to this asmarketfailurebecause resources will be allocated inefficiently. In the case of negative externalities,

private agents will engage in too much of the activity; in the case of positive externalities,they will engage in too little. (The marginal rate of transformation in production will not beequal to themarginal rate of substitutionin consumption due to the effect of the externalityand as a result Pareto optimality will not occurseewelfare economicsfor an explanation.)

Theory

The ideas of social cost, externalities, andmarket failureare often used as an argument for

government intervention in the form of regulations. Libertarians who believe in afree

marketrespond that the existence of market failure should not lead to governmentintervention. They prefer to rely ontradition, community pressure, anddollar voting.

Negative externalities (external costs) lead to an over-production of those goods that have a

high social cost. For example, the logging of trees for timber may result in society losing a

recreation area, shade, beauty, good quality soil to grow crops on, and air quality but this loss

is usually not quantified and included in the price of the timber that is made from the trees.

As a result, individual entities in the marketplace have no incentive to factor in these

externalities. More of this activity is performed than would be if its cost had a true

accounting.
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This can be illustrated with a diagram. Profit-maximizing organizations will set output at Qp

where marginal private costs (MPC) is equal to marginal revenue (MR). (This diagram

assumesperfect competition, under which price (P) equals MR.) This will yield a profit

shown by the triangular area 0,C,F.

But if externalities are present, the attainment of social optimality requires that the full social

costs must be considered. The socially optimum level of output is Qs where marginal social

costs (MSC) is equal to marginal revenue (MR). The amount of output, Qp minus Qs,indicates the excess output due to the externality. Profits will decrease also, from 0,C,F to

0,A,F. It is clearly profitable for the firm to pollute, since "internalizing the externality" hurts

profits. The amount of the externality will decrease from C,D to B,A.

Because the marginal social cost curve (MSC) is above the marginal private cost curve

(MPC), this diagram illustrates the case of a negative externality. If the marginal social cost

curve was below the marginal private cost curve, it would be a positive externality and social

optimality would require a greater output than Qp rather than a reduction of output.

Institutional ecological economists in the tradition ofKarl William Kappprovide a different

definition of social costs, i.e. that share of the total costs of production that is not born by

producers but is shifted to 3rd parties, future generations or society at large. Kapp, hence,

rejected Pigou's confusing terminology of externalities and provides several hundred pages of

empirical data to support his argument that social costs are systemic, i.e. rooted in profit

maximizing behavior of businesses, and an enormous problem of modern civilization. In the

real world, they are usually not or cannot be internalized and must not be considered as

accidental minor aberration from the "optimal norm" that can be fixed with ad hoc measures.
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Externalities and the environmentthe basics

For environmental economics, one of the most important market failures is caused bynegative externalities arising from either production or consumption of goods and services.

A negative externality occurs where a transaction imposes external costs on a third party (notthe buyer or seller) who is not compensated by the market. The result is a loss of allocativeefficiency and shown by a reduction in economic welfare

Environmental externalities generally arise for three reasons:

Common resources (not privately owned - e.g. ocean fisheries)commonly ownedresources may lack the protection of property rights and are susceptible to over-exploitation because the marginal cost of extracting the resource for a privateeconomic agent is close to zero. This is known as the tragedy of the commons

Public goods (indivisible common resources - e.g. the air) Future generations (sources of externality including carbon emissionsgreenhouse

effectscontributions to global warming which threatens future sustainability)

Dead fish on a polluted beachthe external costs of pollutionbut who should pay?

In these cases, the private equilibrium of supply and demand is not the same as the socialequilibrium which includes all costs. In a completely free market, a producer will have noincentive to control pollution because it is externali.e. the producer only considers his/herown private costs and benefits. The market failure arising from negative externalities isshown in the diagram below.


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Economists argue that market failures provide a rationale for policy intervention toimprove economic efficiency. But since market failures are pervasive, intervention is only

justified if the benefits exceed the costs

The Tragedy of the Commons

The contribution of each economic agent is minute, but summed over all agents, these actionsdegrade the resource and may cause severe long term damage

The tragedy of the commons is a metaphor used to illustrate the potential conflict between

individual self-interests of producers and consumers and the common or public good.

In the original version of the term, the example is used of a stock of common grazing landused by all livestock farmers in a small village. Each farmer keeps adding more livestock to

graze on the Commons, because the marginal cost of doing so is zero. But because thecommonly-owned resource is then over-exploited, the result is a depletion of the soil and afall in the value of the resource for all users. The resource may become irretrievablydamaged, an example of apublic bad.

The root cause of any tragedy of the commons is that when individuals use a public good,they do not bear the entire social cost of their actions. If each seeks to maximize individualbenefit, he or she ignores the external costs borne by others. The absence of well defined andlegally protected property rights lies at the heart of the problem.

A tragedy of the commons can occur even without complete and permanent destruction of aresourcethe term can be used to describe any situation where what was perceived as arenewable resource becomes less valuable because of over-exploitation.
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Good examples of the tragedy of the commons:

Burning of fossil fuelscarbon emissionscontributing toglobal warming Pollution of waterways - creating other externalities for users of waterways further

downstream

Logging of forestse.g. the long-term impact on the Brazilian rain forest and theeffects of illegal logging seehttp://news.bbc.co.uk/1/hi/business/4842808.stm

Over-fishing of the oceanse.g. the current crisis in the EU fishing industryseehttp://news.bbc.co.uk/1/hi/sci/tech/4996268.stm

Fly-tipping of waste products on public landperhaps a response to the landfill tax? E-mail spamming on the internet!

Game theory and the tragedy of the commons

The tragedy of the commons can be linked to the prisoner's dilemma that is a core part ofgame theory. Individuals within a group have two options: cooperate with the group or

defect from the group. Cooperation happens when individuals agree to protect a commonresource. Defection happens when an individual decides to use more than his share of apublic resource.

Cooperation has the potential to maximize every individual's benefit in the long run (i.e. the'tragedy' does not happen, the commons are preserved and can be used indefinitely), whiledefection maximizes an individual's benefit in the short run at the expense of destroying it inthe long run. Thus in the case offish stocks, suppliers need to cooperate over a period of timeso that fish stocks can start to rise again. This is the essence of attempts to reform theEuropean Union Common Fisheries Policy.

An alternative to regulation by government is to create a market in property rights in order tocontrol the impact of economic activity on the environmentfor example establishing acarbon trading emissions scheme or introduction tradable fishing permits for the EU fishingindustry.

The Economics of Waste

The UK government wants more waste being disposed of throughincinerationrather thandumped in landfill sites. It hasrestated its strategyand at the top of the waste hierarchy isthe desire to reduce the amount of waste created in the first place from the production and

consumption of goods and services. The main aim is for the volume of waste to grow lessquickly than GDP, in other words to achieve a de-coupling of waste generation from risingeconomic activity. Because waste is normally regarded as a de-merit good creating externalcosts, there is justification for some form of government intervention in the market to changemarket prices, alter incentives and, hopefully, cause a change in the behaviour of consumersand producers.

Over two million tonnes of edible food is dumped by retailers in Britain each year, usuallyinto landfill sites

According to data released byDEFRA, less waste in the UK is being land-filleddown from

82% to 72% for municipal waste between 1999 and 2004 and from 50% to 44% for industrialand commercial waste between 1999 and 2003. A successful waste strategy will bring about
http://business.guardian.co.uk/Guardian/flash/0,,1267004,00.htmlhttp://business.guardian.co.uk/Guardian/flash/0,,1267004,00.htmlhttp://business.guardian.co.uk/Guardian/flash/0,,1267004,00.htmlhttp://www.britishwaterways.co.uk/home/index.htmlhttp://news.bbc.co.uk/1/hi/business/4842808.stmhttp://news.bbc.co.uk/1/hi/business/4842808.stmhttp://news.bbc.co.uk/1/hi/business/4842808.stmhttp://news.bbc.co.uk/1/hi/sci/tech/4996268.stmhttp://news.bbc.co.uk/1/hi/sci/tech/4996268.stmhttp://news.bbc.co.uk/1/hi/uk/5230100.stmhttp://news.bbc.co.uk/1/hi/uk/5230100.stmhttp://ec.europa.eu/comm/dgs/fisheries/index_en.htmhttp://news.bbc.co.uk/1/hi/sci/tech/4622484.stmhttp://news.bbc.co.uk/1/hi/sci/tech/4622484.stmhttp://news.bbc.co.uk/1/hi/sci/tech/4622484.stmhttp://news.bbc.co.uk/1/hi/sci/tech/4708758.stmhttp://news.bbc.co.uk/1/hi/sci/tech/4708758.stmhttp://news.bbc.co.uk/1/hi/sci/tech/4708758.stmhttp://www.defra.gov.uk/environment/waste/index.htmhttp://www.defra.gov.uk/environment/waste/index.htmhttp://www.defra.gov.uk/environment/waste/index.htmhttp://www.defra.gov.uk/environment/waste/index.htmhttp://news.bbc.co.uk/1/hi/sci/tech/4708758.stmhttp://news.bbc.co.uk/1/hi/sci/tech/4622484.stmhttp://ec.europa.eu/comm/dgs/fisheries/index_en.htmhttp://news.bbc.co.uk/1/hi/uk/5230100.stmhttp://news.bbc.co.uk/1/hi/sci/tech/4996268.stmhttp://news.bbc.co.uk/1/hi/business/4842808.stmhttp://www.britishwaterways.co.uk/home/index.htmlhttp://business.guardian.co.uk/Guardian/flash/0,,1267004,00.html


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sizeable increases in waste recycling and composting. Some local authorities have a superbrecord in raising awareness and interest in recycling products. But in other areas of the UK,recycling rates are abysmally low and well below the levels needed to meet UK andEuropean Union targets. Government policy needs to be more effective inenhancing theincentives for individuals and businessesto recycle more of their waste products.
http://www.letsrecycle.com/http://www.letsrecycle.com/http://www.letsrecycle.com/http://www.letsrecycle.com/http://www.letsrecycle.com/http://www.letsrecycle.com/

bangladesh has made some noteworthy progress in the matter of economic

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