The economics of environmental degradation: problems causes and responses.

Some environmental degradation naturally occurs due to human activity. Fast-growing and greatly-indebted developing countries are especially affected by deforestation urban crowding watershed destruction soil degradation reduced biological diversity energy and water shortages overgrazing overfishing and water and air pollution. We should not be too concerned with the physical symptoms of environmental problems but more concerned with their economic consequences. Development policy distortions and market failures have resulted in a disassociation between scarcity and price benefits and costs rights and responsibilities and actions and consequences. This disassociation answers many questions such as why are scarce resources not being used efficiently. The mix of policies and markets often excludes resources from markets. Indeed people are subsidized for excessively using and destroying resources even though resources become scarce and their destruction increases social costs. Thus there is an incentive to maximize profits and destroy resources. Further more authorities allocate public property resources such as forests and fisheries without requesting payment. The taxpayer provides the subsidies. In the end the cost of depletion is borne by the poor and by future generations. Authorities also do not allow prices to increase with rising scarcities. In a well-functioning market increased efficiency substitution conservation and innovation would restore the balance between supply and demand. This report proposes policy reforms designed to increase the efficiency of resource allocation and use and thus to result in environmental and economic benefits. Some suggested reforms include eliminating interest rate ceilings and capital subsidies considering the environment in development projects reducing agricultural taxation and industrial protection and securing property rights to land and other natural resources. USAID can serve as a catalyst and facilitator in establishing an environment favorable to change.