First Draft (Not for distribution)
Species Conservation with Green Consumerism
By
Rafat Alam1
Grant MacEwan University, Edmonton, Alberta
Abstract
The paper models green consumerism and its impact on species conservation under North-South trade
between a capital intensive product and a ‘biodiversity’ intensive product. The paper shows how
environmentally sensitive consumers’ preferences for biodiversity can send market signals to conserve
biodiversity. Northern green consumers can significantly affect biodiversity conservation in the South when
biodiversity rich South is exporting product that affects biodiversity conservation. Under the first scenario
of no differentiation of the product source by the green consumers, the terms of trade for the biodiversity
intensive product improve no matter where the producers of the product are located when they increase the
number of conserved species. But the caveat in this scenario is that the Southern producers can free ride on
green consumerism of the North and conservation effort of the Northern producers. In the alternative
scenario where green consumers can differentiate the source of the products, Southern consumers can not
free ride anymore. In this scenario, if Southern producers do not take conservation efforts - their terms of
trade declines. It implies that unilateral conservation effort by Northern producers will compel the South to
move towards more sustainable production process. The result emphasizes that identification of the source
of products or ‘eco-labeling’ is an essential tool for conservation. But under this scenario, the South may
decide to move towards conserving more species only for the exported biodiversity intensive product and
have lax measures for the capital intensive product. The southern terms of trade will still be increasing in
this case. It has important policy implications for the conservation of biodiversity worldwide. As the terms
of trade for capital intensive product will be falling in this case and the South will have lax environmental
regulations for capital intensive products, it may lead to relocation of capital intensive industries from
North to South. Due to an increase in pollution from this relocation, it can lead to a deterioration of
Southern biodiversity and all the gains attained from conservation efforts in the biodiversity intensive
product may be lost. Also it may give rise to more North-South rift in international trade, as North uses
more sustainable practices for both products and south uses only for biodiversity-intensive product and free
rides the Northern environmental conservation efforts for the capital intensive product.
1
Economics Program, Grant MacEwan University, City Centre Campus, Room 7-368B, 10700-104
Avenue, Edmonton, Alberta, T5J 4S2, Canada, [email protected], [email protected]
1.
Introduction
For the last 25 years, the world is moving towards a free trade regime. At the same time
the concern for the impact of free trade on natural resources is increasing. There is debate
among the environmentalists and the economists on the impact of trade on welfare and
biodiversity. (See Chapter 18 of this volume). Environmentalists “worry that trade will
expand the scope of market failures, put added strain on the environment and lead to
degradation of natural resource stocks in the long run” (Karp et al. (2001), page 617),
which in turn will decrease the welfare of both import and export countries. On the other
hand many economists argue that free trade will improve social welfare and rectify
environmental externalities provided markets function efficiently, property rights over
biodiversity resources are well defined and non-market values of natural resources are
accounted for in the production process.
The fact that most of the world’s biodiversity rich land lies in the populated and poor
south makes the situation even worse. The biodiversity rich South is already
overburdened to meet the demand of their own population for biodiversity derived goods
(such as agricultural products, timber an non timber forest products), while free trade, it
is argued, adds further pressure to over use and over exploit biodiversity resources.
On the other hand, as incomes grow in northern countries their consumers are
displaying an increasingly stronger preference for so called ‘green products’. Ecolabelled and certified fare-trade products are gaining wider acceptance and increasing
their market share as a significant proportion of northern consumers are willing to pay a
premium price for such products. Similar to the quality differentiated goods in the
manufacturing sector there is an emergence of many quality differentiated goods from the
agricultural sector. The quality differentiating characteristic of such goods is not in their
taste or appearance but rather in the ‘environment friendly’ manner with which they were
produced.
Over the last decade several papers have explained the complex relationship between
trade and renewable natural resources. (See Chapter 18 of this volume). A significant
part of this literature has shown that institutional and market failures in resource intensive
countries lead to over-exploitation of these resources and in a decrease in social welfare.
For example, North-South trade models developed by Chichilinisky (1994), Brander and
Taylor (1997b, 1998), Karp et al. (2001) show how a resource intensive country may
over-exploit its biodiversity resources when it fails to define and enforce property rights
over these resources. Habitat destruction by land conversions and agriculture are
indicated as other main causes for the loss of biodiversity around the world (e.g. Reid et
al. (1989); Southgate et al. (1991); Swallow (1991); Wilson (1992); Barbier et al. (1994);
Smulders et al. (2004)). Several other papers (e.g. Swanson (1994); Barbier and Schulz
(1997); Barbier and Burgess (1997); Barbier (2003)) develop models that describe the
impact of trade and land conversion on a country’s natural resource base and its exports.
In these models, the property rights in the south are weakly-defined while the resource
sector produces an exporting product and competes with the agricultural sector. Recently,
Polasky (2004) constructed a model where consumers of both import and export
countries are identical and equally concerned about biodiversity loss but the relative
endowments of biodiversity vary between countries. The model again shows how trade
liberalisation may lead to overexploitation of biodiversity resources and decrease social
welfare. Smulders et al. (2004) constructed a model with three sectors: manufacturing,
agricultural and resource extraction. In their model agriculture and resource extraction
competes for the same habitat area while land has poorly defined property rights. Their
model shows how free trade leads to overexploitation of the resource base and a short
term welfare gain due to reduced search cost for the resource good.
The model in this paper further extends the results derived by an earlier paper Francisco
Cabo2 which is an extension of Arrow-Debreu General equilibrium model of north south
trade following Chichilinisky (1991a). In the model, biodiversity enters as a utility
parameter. The model shows, if environmentally sensitive consumers’ preference for
biodiversity can be incorporated in the market system through some mechanism and how
it may help conserving biodiversity within the market system.
Cabo, Francisco, “Valuation of Biodiversity in a North-South Trade Model’, Environment and
Development Economics 4 (1999): 251-277.
2
2.
The Model
The model is an extension of the model used by Francisco Cabo3 which is an
extension of Arrow-Debreu General equilibrium model of north south trade following
Chichilinisky (1991a).
We assume that there are two goods in the economy: i) A – natural Resource
Intensive and ii) B – K-Intensive and two inputs: i) E – Natural Resources and
ii) K – Human and Physical Capital. The first difference we make from the primary
model is that we assume there is difference in consumption pattern in the north and
the south. In the north, there are two types of consumers: i) Environmentally sensitive
consumers (Green Consumers) & ii) Environmentally non-sensitive consumers (Gray
Consumers). But the southern consumers do not care about the biodiversity and
environment and their consumption pattern is regular. We assume a utility function
for the northern consumer that reflects their sensitivity towards biodiversity
conservation. The utility function is:
U(A,B) = Al (n(A)) B l (n(B))
(1)
Where, l(n) = ∫ e-x/μ/μ dx = 1- e-n/μ
Here, n(A), n(B) – the number of species not affected by the production of A, B. The
assumption here is that A’s production is more respectful than B’s in terms of
biodiversity conservation as it is more knowledge intensive i.e. n(A) > n(B).
l(n(A)), l(n(B)) – measures the value of the n(A), n(B) conserved species under the
production function of A, B.
μ – parameter that measures the concern about biodiversity. If μ increases, more
species have to be conserved to keep the exponents and the utility function conserved.
Cabo, Francisco, “Valuation of Biodiversity in a North-South Trade Model’, Environment and
Development Economics 4 (1999): 251-277.
3
Two additional assumptions are considered. First, the number of conserved species is
product specific, not region specific, i.e. it changes depending on the product, not on
the region. Second, the northern consumers get utility from conserved species in the
south too.
Utility maximization in the north will result in the following equality:
U'B(A,B)/ U'A(A,B) = θAND/BND = PB/PA
(2)
where θ = (n B) / (n A) = 1- e-nA/μ / 1- e-nB/μ
It measures the relative value of n(B) conserved species against n(A). Since n(A) >
n(B), then 0< θ<1.
For the southern consumers we consider a regular Cobb-Douglas equation with no
parameters for sensitivity towards biodiversity.
U(A,B) = Aη B 1-η
(3)
So, for the south, the consumer equilibrium condition becomes,
(1-η / η) ASD/BSD = PB/PA
(4)
On the supply side parameters defining the production function and supply of inputs
differ from the North to the South. We consider that both goods are produced by a
fixed coefficient production function,
AS = min(EA/a2, KA/c2) &
BNS = min(EB/a1, KB/c1),
a2, c2, a1, c1>0
(5)
We assume a dual technology; A is always K-intensive and B is natural Resource
intensive. Thus, D = (a1c2 - a2 c1) is always positive. The more dual the technologies
are, the greater the value of D. Under competitive markets the relationships between
input and output prices are:
PN = (c2 PB - c1PA)/D
(6)
r
(7)
= (a1PA - a2 PB)/D
The supply of each factor is defined as the positive slope function of the price plus
and autonomous supply, E and K respectively:
E S   .PE  E
(8)
K S   .r  K
(9)
The demand for the factors stems from the desired production of the two goods. In
equilibrium, all markets clear,
E D  E A  E B  a 2 A S  a1 B S
K D  K A  K B  c2 A S  c1 B s
These two equations give the values:
B S  (c2 E D  a2 K D ) / D
(10)
A S  (a1 K D  c1 E D ) / D
(11)
ED  ES
(12)
KD  KS
(13)
B D  B S  X BD
(14)
A S  A D  X AS
(15)
PB X BD  PA X AS
(16)
The gap between supply and demand is exported if positive and imported if negative.
Thus X BD is the amount of B consumed, but not produced in the north and X AS is the
amount of good A produced but not consumed in the north. The same equations apply
for the south with different parameter values. World equilibrium ensures equal prices
in both regions. Also the quantity exported by one region must match the quantity
imported by the other region.
PB (S )  PB ( N )
(17)
PA (S )  PB ( N )
(18)
X BS ( S )  X BD ( N )
(19)
X AD ( S )  X AS ( N )
(20)
Using Walras’ law, PB B  PA A  rK  PE E  Y , together with equation (2), and
assuming a price normalization, PA  1 , we find the demand for each product in
equilibrium in the North,
A ND  (rK  PE E ) /(1   )
(21)
B ND   (rK  PE E ) /(1   ) PB
(22)
The above two expressions are the functions of θ, which is negatively related to
demand of A and positively to demand of B. In the same way, we can get for the
South using equation (4),
A SD   (rK  PE E )
(23)
B SD  (1   )( rK  PE E ) / PB
(24)
Equations (6), (7), (8), (9), equilibrium equalities and price normalization lead to a
demand and supply of goods A and B. These are functions of the relative price P B and
parameters in the model. Focusing on product A, in equilibrium, the excess of supply
in the north matches the excess of demand in the south as shown in equation (20), and
therefore, the world’s excess of demand for A, denoted by F(PB), equals zero.
A DS  A SS  A SN  A DN
 F ( PB ) 
PB2 ( N ) / 1    ( S )   PB  ( N )(  1 /   1)   ( S )(1  2 )   ( N ) / 1     ( S ) 
  ( N )( / 1   )   ( S )(1   )  ( N )( / 1   )  ( S )(1   )  0
(25)
where
  a 22  c 22 / D 2 ,   a1 a 2  c1c 2 / D 2 ,   c 2 E  a 2 K / D,   a12   c12 / D 2 ,
  a1 K  c1 E.
In both regions, the coefficients Γ, Λ and Ψ are positive by definition. Ώ and Φ
represent the supply of A and B when the prices of capital input and natural resources
are zero. We assume that the autonomous supply of K and E are large enough to
ensure Ώ and Φ simultaneously positive.
A unique positive root of equation (25) always exists, which will be the relative price
of B in equilibrium, PB* . This depends not only on the parameters of the model, but
also on θ. From PB* , we obtain the equilibrium value of all endogenous variables in
this model.
3.
Analysis of the model
3.1 Effect of n A & nB over the terms of trade, PB*
If the producers of B increases the number of conserved species, n B , then the utility in
the north increases, and also the quotient of marginal utilities grows in the North.
Consequently, by (2), the relative price, PB* , increases. As the Northern consumers
export B from the South and their utility has a parameter for biodiversity
conservation, so the preservation of higher amount of biodiversity lead to higher
utility for them and they are ready to pay more for product B in the international
market. So, for any increase in the preservation of biodiversity by the producers of B
will lead to a higher terms of trade for B, no matter where the producer is located.
The same reasoning applies for the producer of A. The proof relies on the different
marginal utilities of biodiversity in the North, which is greater for product B. As
South is the main producer of product B, it has a comparative advantage in increasing
the number of conserved species and thus raising the relative price.
Mathematically, this result can be shown by the derivative of PB with respect to the
number of conserved species under goods A and B. If we assume,
l (n A )  1  e  na /   1  e ( nan nas) / 
where,
nan = number of species preserved under the production of A by the Northern
producers
nas = number of species preserved under the production of A by the Southern
producers
l (nB )  1  e  nb /   1  e ( nbn nbs) / 
where,
nbn = number of species preserved under the production of B by the Northern
producers
nbs = number of species preserved under the production of B by the Southern
producers.
Then it can be shown that,
PB / n A  PB /  . / n A  0
PB / nB  PB /  . / nB  0
PB / nB  PB / n A  PB /  . / nB  PB /  . / n A  0
(26)4
If the producers of both regions of both products increase their conservation effort,
the total impact on the terms of trade for the South will still be positive. It also
implies that the terms of trade for B will improve no matter where the producers of B
increase the number of preserved species. To capitalize the comparative advantage, if
the South only increase the number of preserved species for product B and North
increases both n(A) and n(B) for domestic consumer preferences, then the terms of
trade for the south will increase more than the case of Cabo’s paper where both
region consumers cared for biodiversity. But in this model, where only the Northern
consumers are environment sensitive, there is a chance that southern consumers can
free ride on the consumer preference induced biodiversity conservation by the
Northern product B producers and enjoy an increase in their terms of trade even
without conserving any extra species, as
PB / nbn  PB / nan  PB /  . / nbn  PB /  . / nan  0
Now we assume that biodiversity also affect the supply side and include it in the
model through the non-constant Liontieff coefficients as the following,
a1N  a1N .e nbn ; a2N  a2N .e nan ; c1N  c1N .e nbn ; c2N  c2N .e nan
(27)
In the same way the coefficients in the South will be affected by biodiversity
conservation. It shows that the supply of one product is related negatively to the
number of undisturbed species. Using the previous model equation (27), we again get
the following,
4
Proof in Appendix
F ( PB ) 

P ( N ).e
 ( N ).e

PB2 ( N ).e  2 nbn / 1    ( S ). .e  2 nbs 
 ( nbn nan)
B
 2 nan
.(  1 /   1)  ( S ).e ( nbs nas) .(1  2 )   ( N ).e  nbn / 1     ( S ).e  nbs .


.( / 1   )  ( S ).e  2 nas .(1   )  ( N ).e  nan .( / 1   )  ( S ).e  nas .(1   )  0
(28)
So, with the increasing cost assumptions also, nothing much changes and for this
equation also we can get a unique solution for PB.5 For the assumption of increasing
cost also, PB /   0 condition holds.6 So, the analysis becomes same as before as
with
the
increasing
cost
assumption
also
the
results
for
 / n A ,  / nB ,  / nan,  / nbn do not change. So, all the previous conclusions
hold.
3.2 Different Weights for the Preference of Biodiversity by the Northern Consumers
We go back to the original model with the assumption of no supply side effect of
biodiversity conservation. We assume that the northern consumers put different
weights for the preference of species conservation by the production process. We
make the assumptions as the following.
I.
Still the production process of the knowledge intensive good, A, affect less
number of species and so is more respectful to environment sensitive
consumers. It is true for both regions. So, (nan, nas) > (nbn, nbs).
II.
The northern consumer’s utility is affected by the loss of biodiversity in any
part of the world. But the South is far richer in biodiversity. So we assume
that among the same producer groups, southern producers can save (or not
damage) more species than the Northern producers i.e. nan < nas and nbn <
nbs. We assume that the utility weights for the on number of species are
5
6
Proof in the Appendix.
Proof in the Appendix.
higher for southern producers for the same products. For product A,  2  1
and for product B, 2  1 .
III.
Product B is natural resource intensive and so producers of product B can save
more species if they use more sustainable methods of productions. So, among
the same region, we assume that the northern consumers put a higher weight
on the species saved by producers of B than that of A i.e. 1  1 & 2   2 . It
follows from this that, (1  2 )  (1   2 ) .
IV.
But we assume that the basic assumption of production process of A is more
respectful than that of B is not changed. It implies, na > nb or
(1nan   2 nas)  (1nbn  2 nbs) . This is a logical assumption given the
current reality of the state of the biodiversity of the world. This inequality can
reverse in two ways, firstly, if 1 & 2 are too high compared to  1 &  2 and
secondly, if (nbn, nbs) are too close values to (nan, nas). Logically the
northern environmentally sensitive consumers may value the biodiversity
conservation in the south more, but they will not put a highly differentiated
weight for the southern biodiversity than the northern biodiversity in which
they themselves live in. So, the first possibility can not happen. Also given the
basic assumption of this model of production process of A being more
knowledge intensive and production process of B being more natural resource
intensive, the second possibility also can not happen in reality. This
assumption will ensure θ to be less than 1.
With the above assumptions we get the value of θ as,
  (nb) / (na) 
1  e  ( 1nbn2 nbs) / 
1  e (1nan 2 nas) / 
As long as θ is positive, the previous result of PB /   0 will be valid. So, to
analyze the effects of different production decisions of the terms of trade P B we just
have to find the values of  / nan,  / nas,  / nbn,  / nbs . These values will
be as the following.
 . 1 .e  na / 
 / nan  
0
.(1  e na /  )
(29)
 . 2 .e  na / 
 / nas  
0
.(1  e na /  )
(30)
 / nbn 
 / nbs 
1 .e  nb / 
.(1  e na /  )
2 .e  nb / 
.(1  e na /  )
0
(31)
0
(32)
Now we can find the effect of different production decisions on the terms of trade PB.
Case A
All the producers in both regions increase the conservation effort i.e. (nan, nas, nbn,
nbs) all increases.
The total effect on the terms of trade will be,
PB / nan  PB / nas  P B / nbn  PB / nbs
 PB /  ( / nan   / nas   / nbn   / nbs )
 PB /  [
1
{( 1   2 )e  nb /   ( 1   2 )e  na /  }]
 na / 
 (1  e
)
(33)
The sign of the above expression depends on the last term in the bracket as all other
terms in the front are positive by definition and by previous proof.
By assumption (1  2 )  (1   2 ) ; also as, na > nb, so, e  nb /   e  na /  .
It proves the last term to be positive. So, for an increase in conservation effort by all
producers, the net effect on the terms of trade is positive i.e. PB > 0.
Case B
The present trend in the world economy is – the northern producers of both
knowledge intensive good and natural resource intensive goods are becoming more
environment friendly. On the other hand, the southern producers are becoming dirtier
in the production of both goods day by day. So, we can look into another case now,
which will reflect the present reality most – we assume that the northern producers
are increasing the number of conserved species for both goods A and B and the
southern producers are decreasing the number of conserved species for both goods A
and B. That means, (nan & nbn) are increasing and (nas & nbs) are decreasing. Like
the previous case, to find the total net effect on the terms of trade, we just have to
analyze the last term of equation (33).
We
know
from
equations
( / nan,  / nas)  0 & ( / nbn,  / nbs)  0 .
(29)-(33)
It
implies
the
that
following
relationship –
 nbs    PB  Effect()
 nbn    PB  Effect()
P 
B
 nan    PB  Effect()
 nas    PB  Effect()
PB / nbn  PB / nbs  PB /  .[
e  nb / 
(1  2 )]  0, as
 (1  e na /  )
2  1
by
assumption and 2  0 in this case.

e  na / 
( 1   2 )]  0, as  2  1 by
 (1  e na /  )
Also, PB / nan  PB / nas  (PB /  ). [
assumption and  2  0 in this case.
But as by assumption, e  nb /  (1  2 )  e  na /  ( 1   2 ) , so the net effect on the terms
of trade will be negative i.e. PB < 0.
It has important policy implications for the south. It implies that south can not afford
to be losing in terms of trade by not moving towards more sustainable production
process if the North does it unilaterally. The income and substitution effect of the
northern consumption pattern will drive down the terms of trade in the south and
compel them to move towards a more sustainable production process.
Case C
To avoid the growing decrease in terms of trade for the environmentally sensitive
utility pattern in the north, the south may decide to move towards conserving more
species only under the production process of the good that they export i.e. the
production process of good B. We still assume that the northern producers of both
knowledge intensive good and natural resource intensive goods keep on practicing
conservation of more species for both goods A and B. The southern producers are
decreasing the number of conserved species for good A and increasing for good B.
That means, (nan & nbn) are increasing and (nas) is decreasing and (nbs) is
increasing. Like the previous case, to find the total net effect on the terms of trade, we
just have to analyze the last term of equation (33).
In this case we find the following relationship –
 nbs    PB  Effect()
 nbn    PB  Effect()
P 
B
 nan    PB  Effect()
 nas    PB  Effect()
PB / nbn  PB / nbs  PB /  .[
e  nb / 
(1  2 )]  0.
 (1  e na /  )

e  na / 
( 1   2 )]  0, as  2  1 by
 (1  e na /  )
Also, PB / nan  PB / nas  (PB /  ). [
assumption and  2  0 in this case.
So the net effect on the terms of trade will be positive i.e. PB > 0.
It has important policy implications for the conservation of biodiversity worldwide.
As the terms of trade for good A is falling in this case and the south has lax
environmental regulations for good A, it may lead to relocation of knowledge
intensive industries from north to south. It can eventually lead to a deterioration of
southern biodiversity and all the gains attained from improved production process in
the south for product B may be lost. Also it may give rise to more north-south rift in
international trade, as north is using more sustainable practices for both goods and
south is practicing only for good B and free riding the northern environmentally
friendly efforts for good A. Eventually it may lead to hidden support for northern
producers from the state and the reverse trend in terms of trade may start to appear.
Case D
The above case may also lead to this case, where, both north and south may keep
conservation effort only for their exported goods – north for good A and south for
good B and stop the effort for the other good. It means (nan & nbs) are increasing and
(nas, nbn) are decreasing.
In this case,
 nbs    PB  Effect()
 nbn    PB  Effect()
P 
B
 nan    PB  Effect()
 nas    PB  Effect()
PB / nbn  PB / nbs  PB /  .[
e  nb / 
(1  2 )]  0,
 (1  e na /  )
here, 1  0 & 2  0 , but 2  1 by assumption and so the whole expression is
positive.

e  na / 
( 1   2 )]  0, as  2  1 by
 (1  e na /  )
Also, PB / nan  PB / nas  (PB /  ). [
assumption and  2  0 in this case.
So the net effect on the terms of trade will be positive i.e. PB > 0.
So, all the four cases above shows that if the environmental sensitivity of the northern
consumers is reflected in the terms of trade PB, then the southern producers has a
strong incentive to move towards more sustainable production of good B. It can thus
improve the state of the biodiversity in the south and the world as a whole.
3.3. Two Types of Preference pattern in the North and One type in the South
Now we can extend the model further by making a more realistic assumption. We
assume that the south has only environmentally non-sensitive consumers and the
north has both environmentally sensitive and environmentally non-sensitive
consumers. To include two different group of consumers, we transform the utility
function into a log linear function without any loss of generality and use two different
weights for the two groups -  1 &  2 . Then the aggregate utility function for the
North becomes as the following,
U N   1{(n A ) log A  (nB ) log B}  {1 log A   2 log B}
(34)
Then we get the consumer equilibrium condition in the North as,
U B  1 (1  e  nb /  )   21 A PB

 
U A  2 (1  e  na /  )   2 2 B PA
A P
   B ,
B PA
(35)
where, θ is now the first term on the left hand side.
In this case, with two groups of consumers also, as long as θ is less than 1, all the
previous results hold. θ is less than 1 for two conditions:
1   2 , or
1   2
If 1   2 , then the value of θ is undetermined and so are the results. For those two
conditions, as the previous results are valid, it sends a very strong signal to southern
producers to shift to more sustainable practices. Even if there are two groups in the
north, the northern consumer preference and hence export demand may be such that,
shifting to sustainable production process will be benefiting for the southern
producers.
We also try to find out the effect of the size of the northern environmentally sensitive
consumers on the terms of trade. It gives us the following expression,
PB PB   21 (1  e  nb /  )   2 2 (1  e  na /  )



 1   1
[ 1 (1  e na /  )   2 2 ]2
This expression is negative for two conditions,
1   2 , or
1   2
(36)
If 1   2 , then the sign of the expression is undetermined so we can not make any
definite conclusion in that case.
But for the first two conditions, it produces the result that,
PB
 0 . It implies, as the
 1
relative importance of the environmentally sensitive consumers increase in the north,
the terms of trade for the south decreases. The result follows from the following logic
– as  1 increases, the relative export demand for product B decreases as its
production process hurts more species and therefore affects the northern
environmentally sensitive consumer’s utility negatively. It brings down the price of B
in the international market.
4.
Results from the Simulation
Following Chichilinisky (1991a), we set the parameters of then model in table 1. The
parameters are set in such a way so that all the assumptions of the model are satisfied.
Table 1
α
β
a1
a2
c1
c2
K
E
λ
δ
North
6
9.7
2
0.015
1
1.7
6
South
75
0.025
4.5
0.02
0.01
3
3
3
0.14
0.12
6
0.56
0.18
Note: We set the value of μ as 0.5 and η as o.4.
From these data we get the relative price PB and its derivative when na and nb grow
equally. The simulation is carried out for all the four cases analyzed in the previous
section and for the case of increasing costs too. It is run for four types of values of na
and nb: low initial values of na, nb with high gap between them, low initial values
with low gaps, high initial values with high gaps, and high initial value with low gaps.
We assume na and nb grow one unit at a time and hence the gap between na and nb
remain same. The results are presented in the following tables.
Table 2: Case A - {(nan, nas, nbn, nbs) ↑ }
Low values, high gap
Low values, low
High values, high
High values, low
gap
gap
gap
nan
0.3
0.4
0.5
0.1
0.2
0.3
0.7
0.8
0.9
0.7
0.8
0.9
nas
0.6
0.7
0.8
0.1
0.2
0.3
0.8
0.9
1.0
0.8
0.9
1.0
nbn
0.02
0.12
0.22
0.02
0.12
0.22
0.3
0.4
0.5
0.6
0.7
0.8
nbs
0.08
0.18
0.28
0.08
0.18
0.28
0.4
0.5
0.6
0.8
0.9
1.0
PB*
1.20472
1.47355
1.5943
1.83184
1.91092
1.92193
1.68086
1.71551
1.7365
1.89473
1.8813
1.86837
PB* (IC)
0.942943
1.15385
1.27995
1.77896
1.87313
1.91151
1.40701
1.5067
1.61462
2.29484
2.41372
2.56276
Table 3: Case B – {(nan,nbn) ↑ & (nas, nbs) ↓ }
Low values, high gap
Low values, low
High values, high
High values, low
gap
gap
gap
nan
0.3
0.305
0.31
0.1
0.101
0.102
0.7
0.8
0.9
0.7
0.8
0.9
nas
0.6
0.595
0.59
0.1
0.099
0.098
0.8
0.7
0.6
0.8
0.7
0.6
nbn
0.02
0.025
0.03
0.02
0.021
0.022
0.3
0.4
0.5
0.6
0.7
0.8
nbs
0.08
0.075
0.07
0.08
0.079
0.078
0.4
0.3
0.2
0.8
0.7
0.6
PB*
1.20472
1.19029
1.17538
1.83184
1.82883
1.82579
1.68086
1.62898
1.56198
1.89473
1.88281
1.86806
PB* (IC)
0.942943
0.93381
0.924493
1.77896
1.77487
1.77075
1.40701
1.31073
1.2038
2.29484
2.1434
1.97414
Table 4: Case C – {(nan,nbn) ↑ & (nas ↓, nbs ↑) }
Low values, high gap
Low values, low
High values, high
High values, low
gap
gap
gap
nan
0.3
0.4
0.5
0.1
0.101
0.102
0.7
0.8
0.9
0.7
0.8
0.9
nas
0.6
0.5
0.4
0.1
0.099
0.098
0.8
0.7
0.6
0.8
0.7
0.6
nbn
0.02
0.12
0.22
0.02
0.021
0.022
0.3
0.4
0.5
0.6
0.7
0.8
nbs
0.08
0.18
0.28
0.08
0.081
0.082
0.4
0.5
0.6
0.8
0.9
1.0
PB*
1.20472
1.56157
1.7644
1.83184
1.83915
1.84636
1.68086
1.77003
1.83939
1.89473
1.93437
1.96839
PB* (IC)
0.942943
1.28801
1.57051
1.77896
1.78758
1.79611
1.40701
1.62161
1.85213
2.29484
2.59125
2.92215
Table 5: Case D – {(nan,nbs) ↑ & (nas, nbn) ↓ }
Low values, high gap
Low values, low
High values, high
High values, low
gap
gap
gap
nan
0.3
0.301
0.302
0.1
0.101
0.102
0.7
0.8
0.9
0.7
0.8
0.9
nas
0.6
0.599
0.598
0.1
0.099
0.098
0.8
0.7
0.6
0.8
0.7
0.6
nbn
0.02
0.019
0.018
0.02
0.019
0.018
0.3
0.2
0.1
0.6
0.5
0.4
nbs
0.08
0.081
0.082
0.08
0.081
0.082
0.4
0.5
0.6
0.8
0.9
1.0
PB*
1.20472
1.20781
1.21088
1.83184
1.8366
1.84132
1.68086
1.74118
1.79338
1.89473
1.92313
1.94941
PB* (IC)
0.942943
1.945065
0.947177
1.77896
1.7842
1.78941
1.40701
1.49582
1.55688
2.29484
2.4088
2.4756
All the simulation results presented in the above tables are in line with the previous
results that we have presented and proved. Only in one case where θ is greater than 1, the
results differ. This is for case A with high initial values and low gaps – here, instead of
increasing, the prices rather decreases. In that case, the value of θ becoming greater than
1 validates our assumptions of the cases when it should be greater than 1.
We get results supportive to our previous conclusion about the change in  1 too. The
simulation results presented in table below shows that the terms of trade PB* decreases
when  1 increases in case of the two conditions ( 1   2 &1   2 ) holding.
Table 6: Change in  1
1
5.
2
PB*
1   2
1   2
1   2
0.1
0.9
1.49188
1.50759
1.47270
0.2
0.8
1.48947
1.48347
1.49674
0.5
0.5
1.48405
1.42951
1.55098
0.8
0.2
1.48035
1.38280
1.58827
Conclusion
The model in this paper further extends the results derived by the earlier paper. It
provides a very strong message for the conservation of biodiversity. In the model,
biodiversity enters as a utility parameter. The model shows, if environmentally sensitive
consumers’ preference for biodiversity can be incorporated in the market system through
some mechanism, it may help conserving biodiversity within the market system. In
reality, biodiversity may be one component out of many parameters affecting the
consumer preference, but still if the consumers send to the market some kind of signal by
internalizing this parameter in the market system, it will have strong consequences for
biodiversity preservation. We are aware of the failure of the market system to do so. But
also we are aware of the fact that there is a large pool of green consumers in the North.
The above model shows that, if the green consumers’ preference patterns are dominate
enough in the North, it alone can generate market signals to conserve biodiversity. Now
the question for further research is what mechanism can incorporate this mechanism into
the market system.
Appendix
Proof of PB* /   0
By solving equation (25) we get the following solution,
P 
*
B
m2  m22  4m0 m1
2m1
where,
m2   ( N ) 
m1  ( N ) 
 1
1
 ( S )  (1  2 )   ( N ) 
  ( S ) 
 1
1
1
 ( S )  
1
m0   ( N ) 

1
 ( S )  (1   )  ( N ) 

1
 ( S )  (1   )
So we get as the following.
PB

 2m1 [
 m0 
[

1
1
2( N )   ( N )  
2
2
(1   )
2 m2  4m0 m1
 2m 2

2( N )   ( N ) 

2
 (1   )


4m1
4 ( N )
( N )  ( N )   m2  m22  4m0 m1

2
(1   )
(1   ) 2

m2
1
1 



2
m
{
2

(
N
)


(
N
)
1
2
2

(1   )
m2  4m0 m1


 2 ( N )
 m2  m22  4m0 m1   
2
 (1   )

] /( 2m1 ) 2

   (21(N)) ] /(2m )

2

2
1

  2( N )  m0  2m1  ( N )  ( N ) }

m22  4m0 m1
m22  4m0 m1


 [2( N ){m22  m2  m22  4m0 m1  2m0 m1 }  2 ( N )   ( N )   2m1  m22  4m0 m1  2m1 m2
 4m12   ( N )  ( N ) ] / 2m1 (1   ) 
2
m22  4m0 m1
(25A)

Now from the assumption that all demands are positive, we know that northern demand
for good A will be positive i.e. ADN > 0.
From this condition we get,
2( N )( m22  m2  m22  4m0 m1  2m0 m1 )  4m12   ( N )  ( N )  
2( N )   ( N )   2m1 
So,
even
if
the
2( N )  ( N ) 2m1 
m  4m0 m1  2m1 m2
2
2
middle
term
m22  4m0 m1  2m1m2

in
the
numerator
(25B)
of
(25A),
 is negative, for expression (25B), the
numerator will be positive. The denominator is positive by definition. So we have proved
that,
PB* /   0
(25C)
Now from the definition of θ in the very first case, we can show the following.


1


(e  n B /     e  n A /  )  0
nA / 
n A n B   (1  e
)
(26A)
as, by assumption, n A  nB &   1 .
We can write expression (26) as the following -
PB / nB  PB / n A  PB /  . / nB  PB /  . / n A  PB /  ( / nB   / n A )
From expressions (25C) and (26A), we can conclude that the above expression is positive
i.e. PB / n A  PB / nB  0 .
Proof of PB* /   0 with Increasing Cost Assumption
With the assumption of increasing cost, the optimal solution for PB takes the following
form.
P 
*
B
m2  m22  4m0 m1
2m1
where,
m2   ( N ) 
m1  ( N ) 
  1 ( nbn nan)
1
e
 ( S )  (1  2 )  e ( nbs nas)   ( N ) 
 e  nbn   ( S )   e  nbs
 1
1
1
 e  2 nbn  ( S )   e 2 nbs
1
m0   ( N ) 

1
 e  2 nan  ( S )  (1   ).e  2 nas  ( N ) 

1
 e  nan  ( S )  (1   )  e  nas
In this new solution nothing much has changed. As by definition (nan, nas, nbn, nbs) are
strictly positive, all the new terms in the above expression are by definition positive. So,
all the arguments of the expression (25) are valid and so are PB* /   0 with Increasing
Cost Assumption also. Then all the arguments in the previous section are valid for
increasing cost assumption too.
References
Barbier, Edward B. and C. E. Schulz, “Wildlife, biodiversity and trade,” Environment
and Development Economics, 2 (1997), 145-172.
Barbier, Edward B. and Erwin H. Bulte, “Introduction to the Symposium on Trade,
Renewable Resources and Biodiversity,” Journal of Environmental Economics
and Management, 48 (2004), 883-890.
Barbier, Edward B., J. C. Burgess, J. T. Bishop, and B. A. Aylward, “The Ecnomics of
Tropical Timber Trade,” Earthscan, Londodn, 1994.
Brander J. A. and M. S. Taylor, “International Trade between Consumer and
Conservationist’ Countries,” Resource and Energy Economics, 30(1997), 267279.
Brander J. A. and M. S. Taylor, “ International Trade and Open Access Renewable
Resources: The Small Open Economy Case,” Canadian Journal of Economics,
30(1997), 526-52.
Bulte, Erwin H. and Edward B. Barbier, “Trade and Renewable Resources in a Second
Best World: An Overview,’ Unpublished Draft Keynote Address in the 12th
Annual Conference of the European Association of Environmental and Resource
Economics, Spain, June 28-30, 2003.
Cabo, Fransisco, “Valuation of Biodiversity within a North-South Trade Model,”
Environment and Development Economics, 4 (1999), 251-277.
Caviglia-Harris, Jill L., James R. Kahn, and Green Trellis, “Demand-Side Policies for
Environmental Protection and Sustainable Usage of Renewable Resources,”
Ecological Economics, 45 (2003), 119-132.
Cheru, Fantu, “Structural Adjustment, Primary Resource Trade and Sustainable
Development in Sub-Saharan Africa,” World Development, 20 (1992).
Chichilinisky, G., “North South Trade and the Dynamics of Renewable Resources,”
Structural Change and Economic Dynamics, 4 (1993), 219-48.
______________, “North-South Trade and the Global Environment,” American
Economic Review, 84 (1994), 851-874.
______________, “North South Trade and the Global Environment,” American
Economic Review, 84 (1991), 851-873.
Copeland, Brian R. and Ashok Kotwal, “Product Quality and the Theory of Comparative
Advantage,” European Economic Review, 40 (1995), 1745-60.
Daily, G. C. (ed.), “Nature’s Services: Social Dependence on Natural Ecosystems,”
Washington DC: Island Press
Dixit, A., “Quality and Quantity Competition,” Review of Economic Studies, 46 (1979),
587-599.
Dixit, A. and Norman, V. “Advertising and Welfare,” Bell Journal of Economics,
9 (1978), 1-17.
Flam, Harry and Elhanan Helpman, “Vertical Product Differentiation and North-South
Trade,” The American Economic Review, 77 (1982), 810-822.
Gowdy, John M. “The Valuation of Biodiversity: Markets, Society and Ecosystems,”
Land Economics, 73(1997), 25-41.
Karp, Larry, Sandeep Sacheti, and Jinhua Zhao, “Common Ground Between FreeTraders and Environmentalists,” International Economic Review, 42 (2001), 617647
Liodakis, George, “Environmental Implications of International Trade and Uneven
Development: Towards a Critique of Environmental Economics,” Review of
Radical Political Economics, 32 (2000), 40-79.
Pearce, David and Dominick Moran, “The Economic Value of Biodiversity,” IUCN,
1994.
Pearce, David and Others, “Blueprint 2: Greening the World Economy,” Earthscan, UK,
1991.
Polasky, Stephen, Christopher Costello, and Carol McAusland, “On Trade, Land Use and
Biodiversity,” Journal of Environmental Economics and Management, 48 (2004),
911-925.
Reid, W. V. and K. R. Miller, “Keeping Options Alive: The Scientific Basis for
Conserving Biodiversity,” World Resource Institute, Washington, 1989.
Smulders, Sjak, Daan Van Soest, and Cees Withagen, “International Trade, Species
Diversity and Habitat Conservation,” Journal of Environmental Economics and
Management, 48 (2004), 891-910.
Southgate, D., R. Sierra, and L. Brown, “The Causes of Tropical Deforestation in
Ecuador: A Statistical Analysis,” World Development, 19 (1991), 1145 – 51.
Swallow, S. K. “Depletion of the Environmental Basis for Renewable Resources: The
Economics of Interdependent Renewable and Nonrenewable Resources,” Journal
of Environmental Economics and Management, 19(1990), 281-296.
Swanson, T. M. “The Economics of Extinction Revisited and Revised : A Generalised
Framework for the Analysis of the Problems of Endangered Species and
Biodiversity Losses,” Oxford Economic Papers, 46 (1994), 800-821.
Tisdell, Clement A, “Economics of Environmental Conservation,” Edward Elgar
Publishing, UK, 1991.
World Bank Publications, “World Resources 1998-99: A Guide to the Global
Environment,” 1998.
“World Development Report,” 1992.
WTO Special Study, “Trade and Environment,” 2000.