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MEC-008: Economics of Social Sector and Environment

MEC-008: Economics of Social Sector and Environment

IGNOU Solved Assignment Solution for 2021-22

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Assignment Code: MEC-008/AST/2021-22

Course Code: MEC-008

Assignment Name: Economics Of Social Sector and Environment

Year: 2021-2022 (July 2021 and January 2022 Sessions)

Verification Status: Verified by Professor


Note: Answer all the questions. While questions in Section A carry 20 marks each (to be answered in about 500 words each) those in Section B carry 12 marks each (to be answered in about 300 words each). In the case of numerical questions word limits do not apply.



Section A



1) Discuss the different approaches to measuring poverty.

Ans) Approaches to Measure Poverty

Over the last five decades, a great deal of research has been done on poverty. To determine the percentage of a country's population who can be classified as poor, various measures based on income levels, food consumption, expenditure data, and large-scale surveys are utilised. Absolute poverty is defined as people who earn less than a certain amount of money in real terms.


The Poverty Line

The poverty line is a monetary figure that represents the minimal amount of goods and services that a household should get in order to meet its basic necessities. To provide a global comparison of population living below the poverty line, the monetary metric of US$ 1 per day is utilised. As a result, the poverty line is a minimum budget that a household must spend over a set length of time in order to meet its basic food and non-food needs. The poverty line in India is determined by a person's calorie intake. In metropolitan regions, calorie intake is set at 2250 calories per capita per day, whereas in rural areas, it is set at 2400 calories per person per day.


Poverty Line in India (Rupees Per Capita per Month)

In effect, the population, which is in absolute poverty, is limited to the expenditure levels of Rs. 1 1 to Rs. 15 per day per person in 1999-2000. Anybody else classified in a higher expenditure bracket is not considered as poor.


The Poverty Gap

The poverty gap is the average of the gaps in income between each poor person's income and the poverty line. The poverty gap is the total amount of income required to get everyone who is poor up to the poverty line. To put it another way, the total poverty gap is the amount of money it would take every day to bring every poor individual in a given economy up to our set minimum income criteria.


Human Capability

Amartya Sen's human capability approach aims to measure poverty in terms of outputs or "ends." Poverty is defined as the lack of essential human qualities to function at a minimally acceptable level within a society, according to this perspective. People's talents and opportunities to live long, healthy lives, to be read, and to participate freely in society are emphasised. Life expectancy, literacy rates, malnutrition, and housing are common competence indicators. The capability indicators measure well-being in terms of end outcomes rather than proxies for those outcomes (such as income, consumption, and nutrition).


The availability of national-level data on various capabilities indicators has allowed the capabilities method to be used to estimate poverty levels. The United Nations Development Programme (UNDP) publishes the Human Development Report on a regular basis, which provides a comparative examination of worldwide economic and social trends. The Indian Planning Commission has started a process to produce national and state-level reports along the same lines. The UNDP and India's Planning Commission utilise capability indicators that are broadly classified as the ability to meet basic requirements, self-esteem, and the ability to choose.


Human Development Index

This is a composite index based on a population's per capita GNP, educational attainment, and life expectancy. The UNDP has created a series based on the basic index, and data on country performance over time is being published on a regular basis. The UNDP publishes an annual Human Development Report that includes numerous metrics and ranks nations based on an index.


Poverty Indicators

The data sources used for measuring poverty are a study of income distribution, disaggregation of other indicators by subgroups and time-use studies. Various studies use all of the following or a few of these indicators to measure the extent of poverty levels in a country.

  1. Proportion of population below minimum level of dietary energy consumption (indigent)

  2. Poverty gap ratio (incidence multiplied by depth of poverty)

  3. Share of poorest quintile in national consumption

  4. Prevalence of underweight children (under five years of age)

  5. Proportion of population below $1 per day (PPP-values)


To implement poverty-reduction programmes, the majority of national governments perform sample surveys. The World Bank has performed multiple studies dubbed the Living Standards Measurement Survey (LSMS), which disaggregate poverty indicators by gender, caste, age, race, and geography to provide information on the poverty levels of certain groups. Similarly, time-use data can be used to investigate sub-populations in terms of the economic worth of their employment (i.e., paid or unpaid), the types of activities they conduct, and the intensity of those activities. This information is frequently used to assess gender equity and intra-household labour divisions.


2) Bing out the relationship between economic development and health.

Ans) It is widely acknowledged that excellent health contributes to increased growth and development prospects (or, conversely, that poor health contributes to diminished economic growth and development). It is proposed in terms of I the relationship between nutrition and labour productivity and growth; (ii) the relationship between fertility and population dynamics and growth; and (iii) the relationship between child and youth health and growth. However, this is not a one-way link, as increasing income (by economic development and the resulting investment in health services) is thought to be beneficial to one's health. Lant Pritchett and Lawrence Summers find a strong causal impact between greater wealth and lower infant mortality in a cross-country regression research. According to their findings, half a million newborn fatalities may have been avoided in the 1980s if the developing world's growth rate had been 1.5 percentage points higher.


Since the early nineteenth century, life expectancy has improved and infant mortality has decreased as a result of modern economic prosperity. These indicators have improved as a result of a better understanding of the causes of illness, such as poor sanitation, as well as technological advancements (e.g. vaccines and antibiotics). Many diseases are not lethal, yet they are incapacitating. Loss of income and out-of-pocket health expenses are part of the economic cost of such illnesses for those who are affected. Low productivity and direct treatment expenses are among the country's economic burdens. The spread of technology and knowledge to low-income countries in the second half of the twentieth century helped to increase access to better sanitary conditions and new treatments. This was made feasible by a growth in money, which would not have been possible without the enhanced services. Even at low economic levels, significant improvements in health can be made. People all throughout the world live over 25 years longer now than they did at similar income levels in 1900, because to intricate synergies between income levels and expenditure on education, better housing, clean water, sanitation systems, infrastructure, health services, and so on. It's also worth noting that the link between health and wealth isn't always straightforward.


Even at low income levels, health advantages will be realised once a key threshold is reached. Even slight increases in economic growth would result in significant improvements in health outcomes at this time. The importance of inter-sectoral synergy is emphasised because it often improves the effectiveness of individual health programmes, particularly in low-income areas. Investment in roads, for example, allows pregnant mothers to arrive on time to delivery facilities and vaccines to arrive at health centres without the cold chain being interrupted. Basic education has been shown to help women make the best decisions when presented with health issues.


Through a demographic relationship, better health can also encourage economic growth. Though not immediately apparent, changes in a population's demographic structure can result in more children surviving to maturity, resulting in an increase in the proportion of economically active to dependent persons. This 'demographic dividend,' it is argued, has the potential to be a major driver of economic growth if the broader policy climate permits these employees to find meaningful work. The changing age structure of the population is predicted to result in rapid increases in per capita income as a result of such synergic intra-sectoral links. In East Asia, for example, the working-age population expanded multiple times faster than the dependent population between 1965 and 1990. This trend has been attributed to decreased infant mortality due to the advent of new health technologies such as antibiotics and anti-malarial medications, as well as general improvements in sanitation and clean water, according to several studies (e.g. Bloom and Williamson, 1998). According to the authors, these health gains accounted for up to one-third of the region's postwar economic growth.


In the same way that excellent health promotes economic progress, poor health can stifle it. This is especially true in underdeveloped countries, where disease burdens are often the highest. Poor health, most clearly, can stifle economic development by lowering the quantity and quality of labour available to a country's economy. As a result, the number of hours worked decreases, lowering the national income earned. If such harmful patterns continue for a long time, an economy's pace of growth will be significantly harmed. As a result of these weak growth tendencies, the government and individuals have fewer resources to invest in other important aspects of advancement, such as education, health, and living circumstances. The vicious cycle of bad health and poverty would be exacerbated even more.



Section B



3) Using mathematical formulation, show that in the presence of externalities, the price taking profit maximising behaviour will not necessarily lead to an efficient allocation of resources.

Ans) An important source of market failure is the presence of externality. An externality typically is an unintended and uncompensated side effect of one person's or firm's activities on another. For example, the health effects of smoke emissions from vehicles. factories and cigarettes. Construction activity in one's house may cause seepage in the neighbour’s house. These side effects occur because of technical interdependence in consumption or production. This interdependence, however, is not reflected in market prices. The action of one economic agent affects the utility or profit level of another economic agent, but not through its effects on prices.


Non-optimality of the Competitive Outcome

The question arises why should we be worried about externalities? The basic problem is that the generator of the externality is deciding how much of the externality to produce but is not considering the effects of the externality on others. Let us model such interactions in a simple way. Suppose we have two producing units, a steel mill and a fishery along a river, steel mill being upstream. The steel mill produces x units of steel I from labour according to a production function

where Ix denotes amount of labour employed in steel mill. In contrast with the standard competitive model, however, we assume that each unit of steel production unavoidably produces some waste or pollution, which is dumped into the river. Let h(x), h'(.)>O, represent this pollution (pollution is monotonically increasing in steel production). The fishery produces y units of fish depending on the amount of labour it employs and the amount of pollution in the water

We assume f(.) and g(.,.) to be concave production functions and [/]<0. As the steel firm's production of h(.) affects the fishery's output, it generates an externality. Let p, q, and w denote the prices of steel, fish and labour, respectively. We assume perfect competition in factor and product markets so that the actions of either the steel mill or the fishery do not affect these prices. The profit functions of the two firms are given by

Each of the two firms chooses output and thus the amount of labour employed to maximize its profit. Assuming interior solutions, the necessary and sufficient first order profit maximizing conditions are

for the steel mill, and

for the fishery. These equations imply that the two firms will employ labour until the value of marginal product of labour in their respective units is equal to the wage rate.


The output chosen by the two units may not be socially efficient as the output of the steel mill adversely affects the output of fish, but the effect is being ignored by the steel producer. We will see below that she is producing "too much" steel. What would a socially efficient production plan look like?


In any Pareto optimal allocation, the optimal level of h must maximize the joint surplus of the two firms. Let us, therefore, consider what would happen if one firm owned both the steel mill and the fishery, and maximized aggregate profits:

The first order conditions for this problem are

production of h is not optimal in the presence of external effects. Rewriting condition

Since dg/dh<O and h’(.)>O, the second term in the square brackets is negative. The optimal choice of labour in steel production, therefore, will be less when the externality is considered than when the two firms operate independently. In contrast, when [dg(.,.)/dh] > 0, h represents a positive externality and results in an under production of steel when the two firms operate independently.'


Although we have looked at an externality between two firms, the analysis can be applied to scenarios where two actors are customers, or even cases where one firm and one consumer are involved.


Even when an externality is negative, optimality does not always imply complete removal of it. This is due to the fact that it benefits the externality's generator. Externalities should be allowed to remain if the advantage is greater than the cost it imposes on others. Externalities should only be eliminated when the harm they cause is greater than the advantage they provide. The externality level is adjusted to the point where the marginal benefit 4 of an additional unit of the externality-generating activity to one economic actor equals the marginal cost to the other agent in the optimum.


In the case above, we can see that when externalities are present, price-taking profit-maximizing behaviour does not always lead to an effective resource allocation. There are numerous approaches to resolving the problem of externalities. The way externalities are regarded affects each solution. One way to look at the issue is that the steel mill is being overcharged. The steel mill only considers the private cost of steel when determining the optimal output of steel. The negative impact of steel on the value of fish output is included in the social cost of steel. We merely need to make sure that the steel manufacturer pays the social cost of steel rather than the private cost to ensure optimal resource allocation.


Alternatively, such situations can be viewed as the result of insufficient property rights: If rivers had owners who had a right to clean water, the owners could sue those who polluted the river, allowing the impacts to be internalised. Similarly, if people could own the air, they'd have to pay the right to pollute it with cigarettes, and passive smoking would be internalised through the market. The precise allocation of these rights between the two consumers is irrelevant for achieving opacity. That is, whether the victim has a right to clean the environment or whether the polluter has a right to pollute it, as long as these rights are adequately established and implemented, it makes no difference. Here's an example of what's known as the Coase theorem (Coase 1960): If externality trade is possible, then bargaining will result in an efficient outcome regardless of how property rights are distributed. There may, however, be practical problems in assigning such rights in many situations.


4) Briefly discuss the usefulness of environmental accounting practices.

Ans) Environmental accounting, as defined in these guidelines, aims at achieving sustainable development, maintaining a favorable relationship with the community, and pursuing effective and efficient environmental conservation activities. These accounting procedures allow a company to identify the cost of environmental conservation during the normal course of business, identify benefit gained from such activities, provide the best possible means of quantitative measurement (in monetary value or physical units) and support the communication of its results. Herein, environmental conservation is defined as the prevention, reduction, and/or avoidance of environmental impact, removal of such impact, restoration following the occurrence of a disaster, and other activities. The environmental impacts are the burden on the environment from business operations or other human activities and potential obstacles which may hinder the preservation of a favorable environment.


Internal Uses

As one step of a company’s environmental information system, internal function makes it possible to manage environmental conservation cost and analyze the cost of environmental conservation activities versus the benefit obtained, and promotes effective and efficient environmental conservation activities through suitable decision-making.


(External Uses

By disclosing the quantitatively measured results of its environmental conservation activities, external functions allow a company to influence the decision-making of stakeholders, such as consumers, investors, and local residents.


Internal functions are carried out within a company. They assess the cost incurred by environmental conservation activities and the related benefits, and are beneficial in improving the efficiency and effectiveness of environmental conservation activities and help in gaining an understanding of what impacts such activities might have on business operations. By using environmental accounting as an environmental information system, it plays the role of a tool to be employed by management and related business segments.


External functions are effective in conveying information about a company’s environmental activities to stakeholders. Environmental accounting data is made public through environmental reports, and covers a company’s stance on environmental conservation activities and concrete measures being taken by the company. By disclosing such information, society’s trust and confidence in the company improves and aids in achieving a better public assessment. Therefore, environmental accounting not only fulfils a company’s accountability to people outside the company, such as consumers, investors and local residents, but also facilitates attaining a fairer corporate assessment, not just from the standpoint of environmental conservation.


5) Write a note on the different theories of ‘common property resource management’.

Ans There are two dominant conceptual models of common property resource management: a capitalist model and a socialist model. The capitalist model argues that resources that are held commonly are subject to degradation. Hence, privatization of public resources is the only viable solution to the problem. The socialist model explains that economic poverty caused by inequitable distribution of resources among rural agrarian population is the driving force of resource destruction. Therefore, collectivization or nationalization of public resources serves as an equitable strategy of resource management. A third model suggested by social scientists, particularly anthropologists, asserts the multiplicity of economic, historical, political, and social dynamics at play in resource degradation. These dynamics have disrupted the local control system which otherwise would serve as effective means of common property resource management. They suggest that the policy makers should recognize, support, and strengthen cultural system and socio-political institutions of local people rather than replacing them with other forms of management strategy, for traditional customs and usages practiced by local people have several positive effects in managing and sustaining common property resources and promoting socioeconomic development.


Common property resources, particularly forests and pastures are rapidly decreasing and deteriorating in developing countries like Nepal resulting in many unintended and unanticipated environmental problems. For many, particularly neoclassical economists, population growth resulting in poverty has exerted pressure on common resources thereby creating what is known as the tragedy of the commons (Hardin 1968). They argue that because of growing population pressure, resources held in common are subject to destruction as individuals maximizes individual gains without bearing the costs. They suggest that the proper solution of the overexploitation of common resources, therefore, is to internalize its costs by making the public aspect of resources private (Runge 1985). With the private property, an individual maximizer will rationally manage resources at its best and highest use and thus remain competitive within the market. They further assume that markets are always best means of allocating public resources and that competition necessarily leads to appropriate management (Vernon 1988).


The socialist model does not accept the population as the principal cause of the tragedy of the commons. It analyzes the increasing rate of population in historical and more socially complex manner than simply invoking aggregate population parameters. For instance, family size reflects rational economic decisions. The cost-benefits ratio of extra-children is high for poor families in poor societies or societies where resources are inequitably distributed, because children contribute economically in agriculture labor or the informal economy of the household at an early age and continue to do so throughout their lives (Hecht 1985). Several community studies from different parts of the world substantiate the assertion of the attribution of high economic values of children in subsistence economies.


The socialist model admits that the environmental problems have their origin in structural poverty among rural agrarian populations. The decision to have extra-children

is a rational response to quite concrete economic factors. The point of analysis then, should not

focus at the correlation between population and poverty, but rather on historical and political

variable that underlie reproductive choice (Hecht 1985). Instead of privatization, public resources

should be collectivized or nationalized. It is believed that collectivization or nationalization

brings major transformation of social relations as well as basic attitudinal and behavioral changes

of the resource users. As a mechanism of equalizing process, collectivization or nationalization

could prevent individual maximizers from their over-exploitation of resources.


6) Briefly explain how the systems approach (i.e. ‘programming and input-output models’ approach) is helpful in educational planning?

Ans) In analyses of cost-quality and education-labour-earnings linkages, input-output models are employed in education economics. Varying degrees and types of education have different time frames, costs, resource requirements, and employment gestation periods. They also lead to a variety of job prospects for those with similar educational backgrounds and for people with different sorts of schooling. With comparable inputs, various levels and types of education might lead to different earning streams. A matriculate, an intermediate, a three-year diploma holder from a polytechnic in any engineering area, someone with three years of industrial training, and a general graduate, for example, would all have different work options and lifetime incomes. The efficiency and economic value of educational courses is shown in which courses lead to which types of jobs and how much lifetime earnings.


The quality of educational outputs is influenced in part by the quality of educational inputs. In some ways, it echoes the English saying "as you sow, so shall you reap." Quality comes at a price. The costs of similar inputs of varying quality are different. If the qualifications/quality of an elementary school teacher changes, for example, the teacher must be paid differently. A graduate or post-graduate with teacher training who chooses to teach at the elementary level differs from a 12 + diploma holder with teacher training. Self-financing urban (private unaided) schools recruit post-graduates to teach at the primary level, whereas government/state funded schools recruit 12+ graduates (with teacher training). As a result, the quality of work and output vary according to the expenses. Input-output analysis is focused on how to improve education quality while lowering or even eliminating the expense of education.


A number of studies in education have used the 'Systems Analysis' technique to investigate the links between input-output variables and how inputs are processed as outputs and emerge as outcomes. Some of these works are listed under the heading "some valuable books" towards the end of the book.


Kenneth Arrow, a Nobel Laureate known for his theory of social choice, criticises the systems approach to education. Arrow, known for his "Screening Hypothesis," said that education serves as a "signal" or "filter" rather than a "path to wages." Gender, contacts, experience, intelligence and competency, emotional maturity, language proficiency, rural-urban background, and other factors all influence a person's employment and earnings potential. As a result, qualifications can only be one of the factors. This criticism can be used to both input-output and cost-benefit analyses.


7) Briefly discuss the case of ‘model with stock effects’ to illustrate the ‘economics of exhaustible resources.

Ans) A resource is depletable if its stock decreases over time whenever the resource is being used. In this case the owner of the stock decides about the rate of extraction keeping in view the exhaustible nature of resource. Extraction of resources. as you can imagine, requires costs to be incurred while the extracted resources generate revenue when sold in the market. Hotelling's rule provides optimal extraction rate for such resources.


Let St represent stock at time ‘t', Et is extraction at time 't'.


Since the stock depletion at time 't' affects availability in future periods, the stream of revenue and costs should be considered. In other words, the resource owner cannot decide for a single period independent of future periods. Given resource and cost functions, with the constraints defined by resource depletability the resource owner chooses extraction over time to maximize present value of total profit. As resources indicate a stock, which can be extracted over several periods, there is future stream Natural Resource Economics of costs and revenues. Moreover, future revenues (also costs) have a lower value than present revenue. Thus, future revenues and costs need to be discounted.


Model with Stock Effects

Extraction costs could depend upon the remaining stock in several possible ways. When most of the original stock becomes depleted, total and marginal extraction costs will increase based upon physical difficulties of extracting remaining quantities. Lower stack may also increase costs independent of the extraction rate, as reductions in remaining stock of water in an aquifer or intense mining leads to Natural Resource Economics subsidence of overlying land. In addition, in earlier phases of resource extraction "learning by doing" could decrease costs as experience with a deposit is gained. If that experience comes about through extracting the resource, then costs c& be modelled as declining endogenously with reductions in remaining stock. Using discrete time model, the Lagrangian function can be expressed as


and the first order conditions are

Based on the first order condition above we find that


The third first order condition gives us

and implies that.

By combining we find that when

By re-arranging terms in the above, we find that

The equation implies that whether the opportunity cost increases or decreases over time depends on the sign of

There are two possibilities.

growth rate is faster than 'r' and the present value increases over time.


The second term on the right-hand side of (10.12) is the present value of future cost increase due to one-unit additional extraction at time 't'. The essence of this model is, opportunity cost exists even if the resource is ultimately not depleted. This is in sharp contrast to the results of the model without stock effects where positive opportunity cost exists only if the stock is completely depleted within the time horizon.


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