The environmental problem may be defined as the problem of natural resource exhaustion resulting from exploitation at speeds beyond their natural recovery rates, which endangers sustenance of life.
This problem has existed almost from the beginning of human history. Primitive economies, based on hunting and gathering, could not have been sustained if people had killed wild animals and collected plants beyond their reproductive capacities to feed the multiplying mouths.
This resource exhaustion crisis was overcome by development of agricultural technology and social institutions such as property rights.
If property rights on certain resources are given to particular individuals or groups, they will utilize their resources efficiently with due consideration for future living, thereby avoiding resource exhaustion – such as one would not kill the goose yielding the golden eggs. However, the stipulation and protection of property rights entails large costs. Compared with arable land near villages, which is fairly easy for villagers to monitor, protection of property rights on remote forests and grazing lands is far more difficult and costly. Further, it is nearly impossible to establish property rights on air and running water. With no property-right assignment, people can use resources without paying costs.
Then they will be likely to abuse these resources to the point of zero marginal private utility, even if this endangers everyone’s living because of eventual resource exhaustion. This human propensity to be ‘free-riders’ is responsible for deforestation and air and water pollution.
The reason that environmental problems are especially acute in developing economies is because changes in technology and institutions lag behind changes in resource endowments. Until the relatively recent past, many developing economies were characterized by sparse population and abundant natural resources.
With the population explosion beginning during the 1920s and 1930s, scarcity of resources rose rapidly. Relative to this development, institutions for conserving scarce natural resources have been slow to develop.
This lag in institutional adjustment tends to become large in developing economies because of poverty and the high rates of discount for future consumption and income among people.
Even if scarcity of natural resources increases, natural resources and environments can be adequately preserved by investment in conservation and anti-pollution activities such as reforestation, soil erosion prevention (such as terracing), and purification of gas emission.
In order to promote these activities, institutional innovations are required, such as setting property rights where applicable, regulating and taxing natural resource utilization, and organizing governmental and non-governmental bodies for environmental monitoring.