Resource and Environmental Economics

Modern Issues and Applications

Clement A Tisdell

• Publisher: WSPC
• Year: 2009
• ISBN:
  9789814365345
• Topic: Economics
• Subtopic: Environmental Economics
• Index: Economics

This important book deals with the essential principles of resource and environmental economics, provides applications to contemporary issues in this field, and outlines and assesses policies being used or proposed for managing the use of environmental and natural resources. Covering specific contemporary topics such as agriculture and the environment, water use, greenhouse gas management, biodiversity conservation, tourism and the environment, and environmental economics and health, leading issues in resource and environmental economics are outlined and analyzed in an innovative manner. Institutional economics (both new and traditional) is applied and compared with other approaches such as neoclassical economics, behavioral economics and the Austrian School of Economics. This heterogeneous, multi-perspective approach enables problems to be considered from several different angles, thus enhancing the reader's comprehension of the subject matter. Furthermore, using minimal technical jargon, the book takes into account aspects of modern economic analysis such as the costs of and constraints on decision-making and the transaction costs involved in policy implementation.

Contents:

• General Issues:
  • The Nature and Significance of Resource and Environmental Economics
  • Different Types of Approaches to Environmental and Resource Economics
  • Economic Failure in Using Resources and the Environment
  • Property Rights, Laws, Markets and Resource Use
  • Regulating Natural Resource Use and Pollution Emissions
  • Economic Valuation of Environmental Spillovers and Natural Resources
  • Sustainability as an Environmental and Economic Issue
• More Specific Topics:
  • Agriculture, Agricultural Policies and the Environment
  • Water Management
  • Biodiversity Conservation
  • Global Warming, Energy Use and Air Pollution
  • Recycling and Solid Waste Management
  • Health and Environmental Economics

Readership: Academics, undergraduates and graduate students in environmental economics, natural resource economics, ecological economics, environmental management and policy studies.

PART I

GENERAL ISSUES

Chapter 1

The Nature and Significance of Resource and Environmental Economics

1.1. Introduction

In this book, the term “resource economics” refers principally to natural resource economics. Originally, economists referred to all natural resources as land and vestiges of this earlier usage are retained in the title of a leading academic journal entitled Land Economics, which focuses on the economics of the utilization of natural resources. The concept of land adopted by classical economists included not only natural terrestrial resources but also marine and other aquatic resources as well as those below the Earth's surface, such as minerals.

Originally, economists considered land (natural resources), labor and capital to be the main factors of production and believed their availability to be the prime determinants of national wealth and economic welfare. While this conception of classical economists might have been reasonably appropriate in Europe in the 18th and 19th centuries, it became less relevant as economic growth and changes in the nature of economic activity occurred. As outlined below, this led economists to revise their views about the main resources contributing to economic welfare and to extend their views about what resources are significant for economic welfare.

This chapter commences with a discussion of the relationships between natural resource economics, environmental economics and ecological economics and then outlines changing views about the basic economic problem (the presence of economic scarcity). It then outlines general factors that add to or ameliorate this problem and indicates how the views of economists about this subject have altered with the passage of time. The penultimate section of this chapter highlights major modern issues (covered in this book) that can be assessed by applying methods developed in natural resource economics or closely related ecological economics. The final section contains general observations about the nature of models used in resource and environmental economics.

1.2. How are the Subjects of Economics, Natural Resource Economics, Environmental Economics and Ecological Economics Related to One Another?

1.2.1. The subject matter of economics

Economics has been defined as the science of the administration or management of scarce resources. Its focus is mainly on the social mechanisms used for this purpose and their consequences for the satisfaction of human wants. The satisfaction of human wants is seen as depending primarily on the quantity (and quality) of goods and services available to individuals. Consequently, even though economics is concerned with important factors that influence human well-being, it does not study all such factors. For example, it does not take into account the value to individuals of different possible types of social relationships, which may affect their sense of belonging and personal satisfaction. Such aspects are taken into account in sociology, social psychology and similar areas of study.

Economic scarcity exists because collectively individuals want more commodities that can be produced with the resources available to them. Consequently, organizational changes that increase economic efficiency and thereby make it possible to supply a greater quantity of wanted commodities (relative to resources used) are desired by most societies. An important objective of economics is to suggest ways in which the social management (administration) of resources can be improved to reduce the scarcity of available commodities. For example, to what extent do market mechanisms help to minimize scarcity? In what respects do such mechanisms have shortcomings and what can be done (if anything) to remedy these shortcomings? What effect do different political systems have for the efficient administration of scarce resources?

However, the problem of making efficient use of available resources is not easily solved. One complication is that the use of resources now affects their availability in the future. In some circumstances, this may add to future scarcity but in other cases, it can reduce future scarcity. For example, if a fixed stock of water is available for use over two periods, using more of it in the first period will reduce its availability in the next. How should the available quantity of water be allocated between the periods in order to obtain the greatest economic value from its uses? On the other hand, greater use of resources in a current period need not spell greater scarcity in the future. For example, if resource use is increased in the current period to support research and development efforts and if this results in scientific advances that reduce the quantity of resources needed (or alters the type or resources required) to produce commodities in the future, this can reduce future resource scarcity. Economics is concerned not only with current scarcity but also with features of economic scarcity likely to emerge in the future, such as the nature of economic scarcity that is likely to occur with the advent of global warming. The connection between current resource use and future economic scarcity is one of the subjects studied in economics.

1.2.2. The nature and coverage of natural resource economics, environmental economics and ecological economics

The subjects of natural resource economics, environmental economics and ecological economics overlap substantially in their coverage but all are concerned with the analysis of the basic economics of managing resource use so as to reduce economic scarcity. These subjects (all subsets of economics) have evolved and have, to some extent, altered their content as the economic problems facing society have changed. It is useful to consider the nature of their evolution.

Natural resource economics (previously known as land economics) emerged as a focus of interest in the early development of economics. Sometimes the French physiocrat (writing about the mid-1700s) is credited with being the pioneers of natural resource economics (see Cleveland, 2008). Possibly, Quesnay (1694–1774) is the most widely known physiocrat. He tended to stress agriculture and the quality of land as the foundation for the circulation of economic wealth and developed the “Tableau economique” (see, for example, Roll, 1945, pp. 130–138; Quesnay, 1991). However, the European mercantilists who wrote at an earlier time also placed emphasis on natural resources as a source of wealth, particularly the importance of mines. Furthermore, Kautilya writing in (what is now India) about 300 BC gave considerable attention to the importance of natural resources as an influence on national wealth (Shamasastry, 1961; Tisdell, 2006). Therefore, the interest of political scientists and economists in natural resources as influences on economic wealth is one of very long standing. Nevertheless, during the late 18th century and in the 19th century, interest in natural resource economics accelerated as a result of enquiries about whether there are limits to economic growth and if so, what determines these limits. In other words, what are the main factors that determine long-term economic possibilities and the likely extent of economic scarcity in the future?

Two main constraints on economic growth were identified:

(1) the diminishing marginal productivity of land suitable for agriculture; and

(2) the need to engage in more marginal mining operations as minerals in the most productive mines are exhausted or become more difficult to recover.

Given the constraints on economic growth posed by what Malthus (1798) called the “niggardliness of nature”, it was thought likely that an increase in income levels would be unsustainable should there be a significant rise in population levels. This led Malthus to suggest policies to restrain population growth. However, the debate did not end there. An important issue became the extent to which scientific and technological progress could stave off this specter of increasing resource scarcity. Ricardo (1817) recognized that scientific and technological progress could be counteracting force to the effects of diminishing resource productivity or economic scarcity. However, Engels (1959), writing in 1844, was most dismissive of the possibility that limited available natural resources of diverse productive quality would place a limit on economic growth — he optimistically declared that nothing was impossible to science. The debate about the ability of the development of science and technology to offset increasing scarcity of natural resources continues today. It is unresolved because the future development of scientific and technological knowledge is highly uncertain.

In due course, more detailed analysis of the economic exploitation of natural resources emerged. Analysis was extended in relation to the economics of mining, the economics of utilizing natural forests, and wild fish stocks and the role of natural resource use in agriculture. The main focus was on primary production and the production of industries depending heavily on the use of natural resources. At the same time, it was recognized that the production of these industries did not depend only on the natural resources available to them. Other factors of production such as man-made capital, labor, human capital and ingenuity were also important contributors to production. While some attention was given to environmental externalities in later developments of natural resource economics, these were usually limited to negative externalities confined to the primary-industries studies, for instance, the negative economic impacts of open-access to fisheries.

The development of environmental economics resulted in a broadening of economic analysis involving natural resources. It made it clear that the quality of these resources could decline due to pollution and environmental deterioration caused by human activity. Pigou (1932) pointed out how such environmental externalities could add to economic scarcity and reduce economic welfare. The examples that he used were not confined to primary industries but included air pollution caused by manufacturing industries and the risk of fire caused by sparks from steam locomotives. His analysis was based on neoclassical economic analysis and emphasized marginal or small changes in economic activity. The larger picture was ignored because of his focus on microeconomic analysis. His work, however, became a starting point for the development of environmental economics, which relied heavily on the application of neoclassical economic techniques.

Ecological economics began developing from the late 1960s onwards. It was more eclectic in its use of analytical methods, favored a holistic approach stressing interdependence between economic activity, the natural world and social systems. For example, Boulding (1966) used the spaceship analogy to emphasize the type of situation facing humankind on Earth — those living on a spaceship only have limited resources (many of which are used up during their mission) and they must be careful not to pollute the capsule in which they exist. Boulding's analogy highlighted resource depletion on Earth and pollution as potential limits to economic growth. These theories were further developed by Georgescu-Roegen (1971) and Daly (1973) and other economists. Focus shifted to the sustainability of economic growth and the factors that do (or could) limit this growth. Natural resource depletion and adverse changes in the quality of natural resources (due to human activity such as the emission of air and water pollutants) were identified by ecological economists as major constraints on the sustainability of economic growth. Misallocation of resources (such as may occur when there is open-access to natural resources) also continued to interest ecological economist. In line with their eclectic approach, ecological economists did not reject completely the type of microeconomic analysis used in environmental economics but emphasized its limits.

As a result of these developments, a synthesis of economic thought has emerged that draws on the development of natural resource economics, environmental economics and ecological economics. Such a synthesis was already apparent in some texts that appear in the 1980s, such as Pearce et al. (1989). Resource and environmental economics as outlined in this book incorporates material that has been developed by economists who have primarily concentrated on the advancement of ecological economics, as well as more traditional materials covered in natural resource economics and environmental economics.

Figure 1.1 provides a rough sketch of the historical development of natural resource economics, environmental economics and ecological economics. It indicates that a synthesis of these approaches seems to be emerging. This book is based upon this eclectic synthesis.

Fig. 1.1. A sketch indicating the pattern of historical development of natural resource economics, environmental economics and ecological economics and the emergence of a synthesis of these subjects.

1.3. Further Observations on the Development of Economic Thought about the Significance of Natural Resources and Environmental Conditions

1.3.1. Changing emphasis on the relevance of natural resources for economic growth and scarcity

As mentioned above, classical economists in the 18th and 19th centuries emphasized the importance of the supply and quality of natural resources as constraints on economic growth and as major determinants of economic supplies. The main constraint to economic growth and production was, in their view, the operation of the laws of diminishing marginal returns and declining marginal productivity.

In their view, the main reasons why these laws apply to economies are that most natural resources (for example, land for agriculture) are in fixed supply and are of uneven quality in terms of their productive potential. However, it was conceded that some natural resources (for example, minerals) are depletable and not reusable, and that as superior grades of these resources are depleted, inferior stocks of these are exploited. Nevertheless, the finiteness of the availability of such resources did not obtain emphasis. Diminishing marginal returns fr...