Unit 1: Key Concepts

Unit One: Key Concepts

Unit Information 2 Unit Overview 2 Unit Aims 2 Unit Learning Outcomes 2 Unit Interdependencies 2

Key Readings 3

FURTHER READING

Bromley DW (ed) (1995) The Handbook of Environmental Economics. Blackwell Publishers, Oxford, UK and Cambridge, USA.

REFERENCES

Boulding K (1966) The economics of the coming spaceship earth. In: Jarrett H (ed) Environmental Quality in a Growing Economy. Resources for the Future/Johns Hopkins University Press, Baltimore, pp. 3–14.

Helm D (2011) Peak oil and energy policy – a critique. Oxford Review of Economic Policy 27(1) 68–91.

Hotelling H (1931) The economics of exhaustible resources. Journal of Political Economy 39(2) 137–175.

Meadows DH, Meadows DL, Randers J, Behrens WW (1972) The Limits to Growth: a Report for the Club of Rome’s Project on the Predicament of Mankind. Universe Books, New York.

Mensbrugghe D, Osorio-Rodarte I, Burns A, Baffes J (2009) Macroeconomic Environment, Commodity Markets: a Longer Term Outlook. Paper prepared for the Expert Meeting on How to feed the World in 2050, 24–26 June 2009, Rome, Food and Agriculture Organization of the United Nations (FAO).

Pearce D, Turner RK (1990) Natural Resource Economics and the Environment. Harvester Wheatsheaf.

Pigou A (1920) The Economics of Welfare. Macmillan, London.

Thomas RL (1999) Using Mathematics in Economics, 2nd edn. Pearson Education.

MULTIMEDIA

Horwitz S (28 February 2011) Are we Running out of Resources? Institute for Humane Studies, LearnLiberty.org.

Available from: http://www.youtube.com/watch?v=AcWkN4ngR2Y An optimistic view from Professor Steve Horwitz in which he discusses economic reasons why we may never run out of many resources. In a free market system, prices signal scarcity and as a resource becomes more scarce it usually becomes more expensive. This can reduce demand and create incentives to develop alternatives or to find and exploit new reserves of that resource previously undiscovered or too costly to exploit. Market incentives and innovation are necessary for this to succeed.

Meadows D (2009) Growth versus Development. World Resources Forum 2009, 14– 16 September 2009, Davos, Switzerland.

Available from: http://www.youtube.com/watch?v=gSPHzkAHwqY Dennis Meadows, co-author of The Limits to Growth (1972), on natural resources, growth, and development.

1.0 INTRODUCTION

Section Overview

This section introduces you to the subject of natural resource economics. It looks at what natural resources are, looks briefly at the concept of sustainability, and considers what distinguishes natural resource economics from environmental economics.

Section Learning Outcomes

By the end of this section, students should be able to:

 explain the difference between different types of natural resources, giving examples

 explain the difference between natural resource economics, environmental economics, and ecological economics

1.1 Classifying natural resources

Natural resource economics is, as the name suggests, about natural resources. But what exactly are natural resources? Think about this for a moment before reading the following definition.

Natural resources are all the original resources of the earth that are utilised by people and the range of natural services provided by these resources that support life and economic activity. Thus natural resources include industrial raw materials and renewable resources such as timber and fisheries, but also other environmental common property resources such as clean freshwater that are used in or support economic activity. Source: unit authors

The definition above stresses that the natural environment is inherently multi- functional. It provides numerous economic functions or services in addition to raw materials such as timber, fossil fuels, minerals, and those relating to food. Thus, physical natural resources are just part of a wider system – the environment. In this module our primary focus is upon the allocation of the physical natural resources that are used as inputs in various economic activities. This is what distinguishes natural resource economics from the broader discipline of environmental economics. We shall say more about this distinction shortly.

Underpinning the definition of physical natural resources are a number of important distinctions between natural resource types which we will now examine in a little more detail.

Renewable and non-renewables Some resources, such as minerals or oil, exist as finite stocks, which are non- renewable within an economic time frame. Others, such as timber or solar energy are renewable and, potentially, the flow of services from these resources can be harvested indefinitely.

However, the distinction is not absolute and the key lies in the word ‘potentially’. The only resources that are always ‘renewed’ are solar radiation, the winds and tides. Many renewable resources such as fish, timber, and even water can be mismanaged, degraded and eventually exhausted. A more useful distinction may therefore be between stock and flow resources.

Stock resources

These are compounds which have taken millions of years to form and so, from an economic perspective, may be considered as ‘fixed’ in supply. There is, therefore, a limit to the quantity of these which can ultimately be used. However, in many cases we do not know where this limit lies. This, in turn, can cause difficulties in designing policies to ensure optimal allocation.

The stock resource class is not a homogeneous one. An important distinction arises between those resources which are consumed by use and those which can potentially be recycled.

With existing technologies many metals can be reused with little loss of quality. In principle, their total stock could remain constant over time, taking account both of the metal remaining in the earth’s crust and that temporarily stored in products. Thus, we may make a further classification into theoretically recoverable stocks and recyclable stocks.

Flow resources

Flow resources are defined as those which can be naturally renewed within a sufficiently short time-span to be of relevance to decision-makers. It is useful, however, to make a further distinction between those flows which do not appear to be dependent on human activity and those which are indefinitely renewable if use remains at or below their capacity to reproduce or regenerate. The latter, the so- called ‘critical zone resources’ can, however, be exploited to exhaustion. If the rate of use exceeds the rate of natural replenishment, such resources can effectively be mined like a mineral stock. Non-critical zone resources remain renewable irrespective of human activity.

Reserves

A further, crucially important, distinction is made between currently exploitable resources and theoretically exploitable resources. Current resource appraisals often identify currently exploitable resources as reserves. These are the supplies of materials or energy which are exploitable in political, economic and technical terms under current conditions. Other sources may not be currently exploitable, but may become so if extraction technology improves or if demand for the resource is high enough to justify exploitation of these more difficult and costly sources. In other words, they may become part of the reserves in future.

1.2 Sustainability

Limits to growth For centuries, researchers have put forward widely divergent views regarding the relationship between economic growth and the increasing use of natural resources. A central theme in the debate about the seriousness of the problem has been that there is some limit to growth, where the earth has a finite amount of resources and therefore a limited capacity to supply resources for human needs and activities. As the natural world provides our resource base, it is proposed that this finiteness could be, or could become, a problem and must therefore be incorporated into economic decision-making processes.

Today, these concerns are often couched in terms of ‘sustainability’ and ‘sustainable development’. These concepts are very broad and their use extends far beyond the narrow confines of economic growth to include a much broader view on the developments needed to enhance human welfare.

Sustainable development The basic premise of sustainable development is that activities to promote it need to take into account the needs of both current and future generations. Importantly, the activities of the current generation should not compromise the ability of future generations to meet their own needs. The concept of ‘inter-generational equity’ is central to most definitions of sustainable development.

Additionally, for an activity or policy to be sustainable it needs to be economically, environmentally and socially sustainable. Clearly, though, it can be difficult to define with any precision the criteria for sustainability in each of these three dimensions, let alone specify the trade-offs and synergies that exist between economic, social and environmental goals. Identifying the needs of current generations is fraught with difficulty, doing the same for future generations faces even bigger obstacles. Sustainable development can therefore be defined in many different ways and defining it for practical purposes is ultimately the outcome of political processes.

Income and growth At the macro level, natural resource economics typically approaches the sustainable development debate with a somewhat narrower focus, namely that of income and economic growth. It assumes that economic growth is a desired goal because by enhancing people’s income and consumption it raises their welfare. It then looks at how different patterns of natural resource use affect that goal, not only in terms of present income, but also in terms of the income of future generations.

Bear in mind, though, that whilst natural resource economics is implicitly concerned with macroeconomic growth, its practical application typically takes place at the micro level – eg identifying efficient and sustainable harvesting rates for renewable resources, or analysing the economic effects of different rates of non-renewable resource extraction.

Steady-state equilibrium In the context of renewable natural resources in particular, one definition of sustainability relates to the concept of a ‘steady-state equilibrium’. Steady-state refers to a stock size and a flow of services that is sustained over an indefinite period

of time. In other words, a steady-state is a kind of equilibrium, which, in the absence of any outside forces, can be sustained forever.

However, it has been argued that a steady-state is a rather extreme and unrealistic target at which to aim in relation to ‘real world’ natural resource management. Indeed, in very few cases has the history of natural resource use remotely resembled anything even approaching the hypothetical steady-state. Therefore, some have suggested that perhaps a more realistic sustainability ‘target’ might be to prevent renewable resource flows from declining.

However, even this, rather laxer, sustainability target runs into a host of problems when applied in the real world. So, in practice, a host of complex trade-offs and conflicting objectives will usually need to be assessed on a case-by-case basis, in relation to ‘real world’ natural resource management

Substitutability and irreversibility An important factor in assessing the ‘sustainability’ of natural resource flows relates to the issues of ‘substitutability’ and ‘irreversibility’. Substitutability refers to the extent to which the function performed by the flow of one natural resource could be performed by an alternative resource, natural or man-made. Irreversibility draws attention to the risks of exploiting resources in ways that lead to irreversible changes (typically declines) in the stocks or flows of valuable natural resources. These dangers are obviously greatest if there are unlikely to be any close substitutes for the damaged resource.

 Can you think of any examples where one natural resource might be substituted by another natural resource or by a man-made resource? Answer. There are many examples one could give. An important one is the substitution of oil and gas for coal and charcoal or wood as a fuel. A less obvious one is the substitution of human capital and know-how for oil and gas. Although the former can never on its own completely substitute for the latter, investments in human capital can lead to major efficiency gains that will allow far less fuel to achieve a particular energy output or service. Ultimately, however (and hopefully, in terms of reducing harmful climate change), human capital combined with energy from renewables and perhaps nuclear power (such as fusion-based technologies) may substitute completely for fossil fuels.

 Can you think of examples of where ‘irreversibility’ might be of particular concern? Answer. Again, there are many examples one could give here. The most obvious one relates to irreversible changes in the environment and its ability to support human and other life resulting from major climate change. Reductions in the stocks of non-renewable resources (oil and minerals) are, for practical purposes, irreversible, although how dangerous this is will depend upon the ‘substitutability’ question. Certain types, and levels, of damage to biological resources – natural eco-systems particular species and genetic biodiversity generally – are irreversible (and depending on the ‘service’ provided by the resource) may not be ameliorated by ‘substitution’.

Scarcity In economics the concept of scarcity is defined in terms of the relationship between supply and demand. Without demand there can be no scarcity, but as demand rises in relation to supply, or supply declines in relation to demand, scarcity rises. This is clearly happening in relation to natural resources as a whole, and in relation to some natural resources in particular, although the processes involved are often quite complex.

1.3 Origins and related disciplines

We have already begun to describe what natural resource economics is and you will obviously learn more about the subject as you progress through this module. However, before we conclude this section, it is worth saying a little bit more about its history and how it fits in with related fields of study.

Classical economics Natural resources have always been part of the study of economics ever since economics emerged as a distinct discipline during the time of Adam Smith (1723– 1790). Indeed, during the so-called ‘classical’ period of economics natural resource scarcity was a focal concern, particularly in relation to the effects of population growth on the demand for food and the strain this placed on agricultural land. A famously pessimistic view is associated with Thomas Malthus (1766–1834) who predicted that, whilst living standards were being driven up by the industrial revolution, they would inevitably fall back to subsistence levels as attempts to raise food production ran into the problem of the diminishing marginal productivity of land. Even amongst the less pessimistic classical economists, such as David Ricardo (1772–1823) and John Stuart Mill (1806–1873), the limits to economic growth caused by diminishing marginal returns were widely recognised.

Towards the end of the classical period of economics, pessimism about food production and growth more generally waned due, in part, to the opening up of new agricultural land in the Americas and other less densely populated colonies and also due to improvements in technology that raised the marginal productivity of existing agricultural land. In more recent times, however, a ‘neo-Malthusian’ pessimism has occasionally resurfaced – notably, following the oil shocks of the 1970s and again in the late 2000s in response to the so-called ‘triple-f’ crisis (food, fuel, and finance) during which fuel and food prices spiked simultaneously, a 30-year long decline in food prices appeared to be at an end, and global finance fell into turmoil.

Neoclassical economics Back in the latter half of the 19th century increasing optimism about the ability of agricultural production to keep pace with the rising demand for food coincided with the arrival of ‘neoclassical’ economics which, in its early days, focused mainly on the way in which markets and prices signal preferences and allocate resources within an economy. In contrast to many classical economists, they were less concerned about the size of the economy as a whole or constraints to growth, focusing instead on the way consumers and firms make decisions and interact with each other in competitive markets. The work of neoclassical economists, such as Leon Walras (1834–1910), William Jevons (1835–1882), Alfred Marshall (1842–1924), and others led to a body

of theory that continues to provide the underlying framework for most economic analysis today. Indeed, although the neoclassical school has evolved in response to challenges from both outside and within the school, mainstream economics (especially microeconomics) is often treated as synonymous with neoclassical economics. Although many modern economists, especially in applied fields, would reject this label, preferring to call themselves institutional economists, political economists, welfare economists, environmental economists etc, most recognise a debt to neoclassical economics and continue to use many of its models and analytical tools.

Welfare economics One branch of neoclassical economics that has been influential in natural resource economics is welfare economics. Welfare economics seeks to understand how different allocations of resources affect the welfare of society as a whole or, indeed, specific interest groups within society. It combines neoclassical theories of the consumer and the firm with utilitarian theories of ethics to produce decision-making criteria that can be used by policy-makers to rank alternative ways of allocating scarce resources.

Drawing on ‘utilitarianism’ these rankings are set according to the level of benefit each allocation conveys to society as a whole. Estimates of social benefit or social value are based upon the underlying assumption that individuals are the best judge of what is in their interests, and that if competitive markets existed for all scarce resources, these interests or preferences would be implicitly revealed, in aggregate, by the way markets respond to each individual’s participation in the market place. Under these assumptions the equilibrium prices resulting from the interaction of supply and demand in competitive markets (for both inputs and outputs) are said to reflect the value that society places on goods, services and factors production (land, labour and capital). These prices form the basis of the calculated values that welfare economics uses to compare one resource allocation against another.

Of course, competitive markets often do not exist. Hence, much effort in welfare economics is devoted to finding ways to

 make markets more competitive

 correct the price signals that emanate from non-competitive markets (eg through taxes and subsidies) so that the resulting resource allocations move closer to the competitive ideal

 create competitive markets for scarce resources that are not currently allocated through market mechanisms

 identify what preferences would be revealed if there were competitive markets (eg through experiments and surveys), so that where market allocation is not possible resources can be allocated as though it were

Bear in mind that the preferences revealed in competitive markets, and hence the resulting market prices, are governed in part by each individual’s purchasing power. Since this is a function of their wealth, it is possible that significant alterations in the distribution of wealth within society would reveal a different set of preferences and lead to an alternative set of market prices for use as the metric in social valuations. However, welfare comparisons between alternative resources allocations need to be based upon the same metric – ie they need to be based upon the same set of prices.

Hence, when welfare economics compares different resource allocations, it assumes that the underlying distribution of wealth associated with each option is broadly the same.

Natural resource economics Natural resource economics, and indeed environmental economics, draw heavily on the neoclassical approach to economics, including the models and techniques of neoclassical welfare analysis. The distinctions between natural resource economics and environmental economics are increasingly blurred in that the two are often studied together as a single discipline. Nevertheless, there are historical differences in the evolution of these subjects, which mean that they are often studied separately. That is the case with this module which does not deal with many of the issues covered in environmental economics courses.

Historically, the study of natural resource economics has tended to focus on raw materials, treating them as inputs in a production function, and exploring related input and output markets and the efficiency and welfare implications of different patterns of resource exploitation. The approach is often exemplified by the following, or related, models

 the fisheries model

 the forestry/timber extraction model

 the non-renewable resource model (eg oil)

One of the most seminal works in natural resource economics dates back to 1931 and the publication of Hotelling’s model of exhaustible resources (Hotelling 1931). However, although Hotelling and others were developing economic models of natural resource extraction at that time, the discipline of natural resource economics did not have much of a profile before the 1970s, a period of raised anxiety about the environment and the limits to growth posed by the finite supply of oil and other critical resources.

Environmental economics Environmental economics also emerged in the 1970s. It was driven by many of the same concerns as natural resource economics (eg the sustainable harvesting of natural resources) but also included a special focus on the problem of pollution and the value of the environment as a place to live in and value for its own sake. A seminal work in environmental economics also dates back to the early 20th century when Arthur Pigou’s The Economics of Welfare (Pigou 1920) introduced and explained the concept of an ‘environmental externality’. Much of modern environmental economics is focused on ways of addressing environmental externalities, such as pollution.

It is important to bear in mind that environmental economics and natural resource economics are complementary rather than competing fields of study. Both offer useful sets of tools for studying particular types of environmental problem.

Ecological economics Ecological economics has rather different roots from those of either natural resource or environmental economics. Whilst the latter bring the environment into economics

– applying conventional economic tools and analysis to environmental and natural resource problems – ecological economics brings the economy into the environment – expanding the study of ecological systems to include the economic systems that operate within and across ecological system and sub-system boundaries.

Whilst environmental and natural resource economists use similar sets of tools to examine a slightly different set of problems, ecological economics challenges excessive reliance on this set of tools. Indeed, it was established (in the late 1980s) by its originators as a competitor to mainstream natural resource and environmental economics, as an entirely new discipline with its own set of tools. Its tools seek to integrate insights from a much broader range of disciplines in both the natural and social sciences.

Although the subject matter of this module is not generally viewed through the lens of ecological economics, ecological economics clearly does provide valuable insights, and it is hard to argue against the need for inter-disciplinary perspectives in the study of environmental problems. The big question is whether this should be met through greater inter-disciplinary co-operation in tackling environmental problems or by the replacement of existing disciplines with something new (ie ecological economics). There isn’t scope to explore that debate in this module (which covers an existing and relatively well established discipline), but it is something you may reach your own conclusions about as you learn about the strengths and weaknesses of natural resource economics.

Section 1 Self Assessment Questions

uestion 1

Match the correct definitions in the table below.

(a) Stock resources (1) Consumed by use, theoretically recoverable, recyclable

(b) Flow resources (2) Critical zone resources, non-critical zone resources

(d) Recyclable (4) Fossil fuels such as oil, coal and gas

(e) Theoretically recoverable (5) Metallic and non-metallic minerals

(f) Critical zone resources (6) Metals which can be used many times over with little loss of quality

(g) Non-critical zone (7) Solar energy, tide, waves, wind, air resources

uestion 2

In relation to the following table, which option is likely to be the most conducive to sustainable development?

1, 2, 3 or 4

Irreversibility of environmental damage Substitutability of scarce natural High Low resources High 1 2

Low 3 4

uestion 3

Which of the following are valid statements?

(a) Natural resource economics is more focused on pollution than environmental economics.

(b) Ecological economics draws heavily on the tools of neoclassical economics and welfare economics.

(c) The neo-Malthusian perspective on the environment is optimistic about the environment’s ability to cope with the pressure placed upon it by human activity.

(d) Although, in principle, the total stock of potentially recyclable resources could remain constant over time, taking account of both the metal remaining in the earth’s crust and that temporarily stored in products, the idea of a complete recycling remains a theoretical one due to losses in the process of recycling.

(e) A central concept in ‘sustainable development’ is that of ‘inter-generational equity’.

2.0 ECONOMY AND ENVIRONMENT

Section Overview

This section takes an introductory look at ways in which the interaction between the economy and environment can be conceptualised. It looks at the services that the environment provides to the economy and contrasts the way traditional economic analysis has treated the environment with more ecologically rooted perspectives.

Section Learning Outcomes

By the end of this section, students should be able to:

 discuss different conceptualisations of the economy–environment relationship and how they have evolved over time

 outline the main services that the environment provides to the economy and how they are interrelated

2.1 Interdependence

The ‘cowboy economy’ Prior to the advent of natural resource and environmental economics, economists paid relatively little attention to the relationship between the economy and the environment, partly because, in the early days of neoclassical economics, the economy did not appear to face major environmental constraints and also because environmental issues were considered less important than economic growth. The economic system received inputs from the environment and delivered waste back to the environment (as depicted in 2.1.1) but little attention was given to how the extraction of inputs might affect the environment or the environment’s ability to deliver those inputs to the economy in the future. Nor was much thought given to the impact of putting waste back into the environment – in particular, how that waste might affect the environment’s future ability to absorb waste or its ability to perform other functions for the economy, including life-support functions and the provision of amenity services (agreeable living spaces, recreation etc).

2.1.1 The ‘cowboy economy’

ECONOMY

raw materials waste (input) (output)

Source: unit author

Kenneth Boulding, one of the early inspirations for ecological economics, called this view of the economy–environment relationship the ‘cowboy economy’ (Boulding 1966), in an analogy that is suggestive of the 19th century American ‘wild west’ where seemingly limitless natural resources were up for grabs to anyone venturing away from the more developed and densely populated eastern seaboard.

Economic analysis of the environment The advent of natural resource economics and environmental economics represented a move away from the ‘cowboy economy’ model to one in which economic analysis took account of the impact of the economy on the environment and how this impact fed back into the economy. This is depicted in 2.1.2 which is a very simplified representation of the economy–environment relationship.

2.1.2 Natural resource and environmental economics

Source: unit author

Raw materials from the environment provide economic benefits, but their current extraction, in turn, affects the prospects of future extraction (hence, the two-way arrow). This is the particular concern of natural resource economics. The figure also shows waste from production and consumption which cause pollution and feeds back to the economy via the latter’s negative impact on human health and amenity values. These relationships can be analysed using the tools of environmental economics. The approach of both natural resource economics and environmental economics is to treat the environment as a source of services or inputs into the economy. These and any negative externalities arising from waste or over-extraction are given economic values, thereby bringing the environment into the accounting framework of the economy.

Boulding’s ‘spaceship earth’ Another way of conceptualising the economy–environment relationship is depicted in 2.1.3. Here the economy is located physically within a larger system – the environment – which (apart from solar energy and energy radiated back into space) is a closed system with no material exchange across its borders. Boulding (1966) likens this to a ‘spaceship’ with strictly limited life-support capabilities that depend upon achieving a delicate balance between consumption, material recycling, and energy harnessed from outside. The larger the economy is in relation to the environment, the harder it is to maintain this balance. Indeed, many people think that, in material terms, the economy is already too big. However, whilst some

believe the solution lies in reigning back consumption and halting economic growth, others see the balance being restored through technological innovation (eg cleaner energy) and institutional change (eg giving environmental services an economic value and ensuring that environmental damage is not treated as if it were cost-free).

2.1.3 ‘Spaceship earth’

ENVIRONMENT

ECONOMY

waste inputs

recycling

Source: unit author

Clearly there are many institutional changes needed to place the economy– environment relationship on a more sustainable footing. Natural resource and environmental economics provide useful insights for policy-makers seeking to set priorities for institutional reform. However, the relationship between the environment and the economy is extremely complex and deeply intertwined with the political and social forces behind resource allocation and institutional change. Understanding these forces is very important, but largely beyond the scope of mainstream natural resource and environmental economics. For a deeper understanding of these issues it is necessary to look to other disciplines, such as political economy and social psychology.

2.2 Services

In the previous section we noted that the environment provides human beings with a range of services. Indeed, this is how mainstream economic analysis of the environment tends to view the economy–environment relationship.

 We now look in a little more detail at those services, but before we do think for a moment about what those services might be and how they impact upon your own life and the lives of people around you.

Answer. For the purposes of this unit we shall divide environmental services into the following categories – Life support – Resources for production – Waste sink – Amenity services

Life support The most important service is that of ‘life support’. One can debate the minimum requirements for life support, but few would question the need for breathable air, a temperature range capable of sustaining human life, sufficient amounts of food and water, and protection from harmful levels of solar radiation. The environment performs numerous functions in its life-support capacity, many of which also relate to the maintenance of sufficient environmental stability for human survival – eg limiting the incidence of catastrophic flooding and extreme weather. The ability of the environment to provide life-support services will depend, in part, on the size of the population, on the state of food production technology, and the demand for other environmental services.

Whilst the earth probably still has some way to go in terms of the maximum population it could potentially support, in practice, its carrying capacity depends on the extent to which resources are diverted from food production to other productive activities, and how much of the natural environment is left intact to sustain non- human life. The diversion of resources away from basic life-support functions is clearly problematic for some of the world’s poorest people given the existing distribution of income and assets. However, at a global level, maximising the earth’s human life-support capabilities (in terms of population) is not something that is ever likely to be achieved, or, indeed, desired.

Resources for production The environment’s function as a supplier of raw materials is clearly a pivotal part of the economy–environment relationship and is the focus of natural resource economics. We have already discussed some of the characteristics of this service in our classification of resources in Section 1 of this unit. Resources can be renewable or non-renewable and take the form of stocks and flows. Some resources can be easily substituted with other resources, but many cannot. For some resources, extraction rates can be slowed through recycling (metals and timber, for example), but recycling is not always possible (eg in the case of oil and coal).

 The rate at which resources are extracted can affect the sustainability of both the resource provision service itself as well as the other services provided by the environment. Before reading on take a minute to think about how this might be.

Answer. An obvious example is in the impact of resource exploitation on food availability. Overfishing can lead to the collapse of fish stocks and over- exploitation of soils in crop production can lead to a loss of soil fertility for future food production. Food production is also affected by the manner in which water resources are exploited. For non-renewables extraction now will diminish the services these resources can provide for future generations. The use of resources in production and consumption produces waste products, which can, once they have reached critical levels, affect life support, resource, waste sink, and amenity services (see below for more on the latter two).

Waste sink The environment acts as a sink for the waste products of economic activity. It is a place to dispose of the unwanted by-products of production and consumption – above all in a manner and place which ensures that the waste (whether in solid, liquid or gaseous form) does not cause harm or inconvenience to human beings. The environment has the physical capacity to assimilate certain quantities of waste in ways that meet these requirements.

The ecological systems that constitute the environment operate through the perpetual recycling of outputs from natural processes to produce each new generation of living organisms and each consecutive stage in the cyclical transformation of inorganic matter, such as in the nitrogen cycle or the hydrological cycle. Waste products from the human economy can be absorbed by these processes, toxic wastes can be filtered or diluted to render them harmless to human health, wastes that are slow to decay or decompose can be buried in places where they will cause little harm.

How well the environment fulfils this waste sink function depends upon the quantity and quality of waste that is produced and the methods of disposal. The environment’s assimilative capacity is not limitless. Too much waste of the wrong sort and in the wrong place can reduce the environment’s assimilative capacity, damaging not only natural ecosystems but also the protection they afford to humans against the pollution caused by their own waste.

 Excessive exploitation of the environment as a waste sink harms other environmental services too. Think why this is the case before reading on. Answer. The biggest threat posed by waste is to the life-support system itself. Whilst, the interactions between waste and the ecosystems that support life are complex and varied, the current consensus is that the production of greenhouse gases, for example, are altering the climate in ways that may, if left unchecked, radically modify the life-supporting functions of global ecosystems. The supply of renewable resources will almost certainly be affected. The impact of waste on amenity services is examined in the next section.

Amenity services Environmental and natural resource economics, with their roots in neoclassical welfare economics follows a utilitarian ethic. This means that the value of things is measured by the utility or satisfaction they bestow upon people, whatever the source of that utility may be. Amenity services relate to the pleasure and satisfaction that people derive from the environment for any reason other than its life-support, resource reservoir, and waste sink functions.

 Before reading on, make a list of the different amenity services provided by the environment. Answer. Here is a list of some important ones that it provides: – An agreeable place to live in above and beyond basic life support. This is reflected, for example, in the high prices attached to homes in beautiful locations. – A place for recreation – walking, hiking, swimming, wildlife-watching, or simply relaxing. – A place for filming – much of the pleasure people get from nature is via television or cinema. – Existence value – many get pleasure from merely knowing that the environment is in ‘healthy’ condition and, conversely, suffer disutility from the destruction of natural habitats and the loss of biodiversity, even though they themselves are not directly affected.

The analysis of amenity value is the preserve of environmental economics, rather than natural resource economics. Nevertheless, in studying natural resource economics one obviously needs to be aware that the exploitation of natural resources as raw materials for production and consumption can damage the environment’s amenity services, either directly through the extraction process or indirectly via the pollution created by production and consumption. Any economic analysis of natural resource exploitation that does not account for significant damage of this sort will be incomplete. That is why natural resource economics and environmental economics are complementary rather than competing disciplines.

Section 2 Self Assessment Questions

uestion 4

Which of the following are valid statements?

(a) Traditional economic analysis prior to natural resource and environmental economics treated the environment like a ‘spaceship’.

(b) Natural resource economics and environmental economics give economic values to the services provided by the environment.

(c) In the spaceship model of the economy–environment relationship the relative size of the economy in relation to the environment is of critical importance.

(d) The size of the economy that the environment can support has little to do with the state of technology.

(e) Recycling and pollution control increases the size of the economy that the environment can sustainably support.

uestion 5

Find the best match for the following environmental services and processes (noting that there is a potential overlap).

Service Process (a) Life support (i) Climate regulation and UV protection

(b) Resource reservoir (ii) Decomposition

(d) Amenity (iv) Rock formation and photosynthesis

uestion 6

True or false?

The services provided by the environment are interconnected – they depend upon a common set of processes and damaging one of these services risks damaging the others.

UNIT SUMMARY

This unit provided an introduction to the subject of natural resource economics. Its aim was to give you a broad understanding of what the subject is about, including the problems and questions that are important for the discipline and the way they are tackled.

Section 1 This introductory section began by looking at the way natural resources can be classified and included discussion of renewable versus non-renewable resources, stock versus flow resources, and reserves. We looked briefly at the concept of sustainability and sustainable development and highlighted the importance of substitutability and irreversibility in defining degrees of sustainability.

We concluded the section by looking at where natural resource economics fits in with other related disciplines. We noted that it is closely allied to environmental economics, in that it draws inspiration from the models and tools of neoclassical economics and neoclassical welfare economics (in contrast to ecological economics which is more rooted in the discipline of ecology). Natural resource economics distinguishes itself from environmental economics by being more focused on natural resources as raw materials for production rather than on the broader set of services that they provide.

Section 2 This section gave an overview of the interdependencies between the economy and the environment, contrasting three different ways in which this interdependence can be perceived. The first is the ‘cowboy economy’ view in which the natural environment is treated as a source of inputs for the economy and a sink for its wastes, with no limits on the extent to which it can be exploited. The second view is associated with the arrival of natural resource and environmental economics that recognised the limits and sought to bring environmental values into an economic accounting framework. The third is the ‘spaceship earth’ view in which an increasingly large economy is located within an increasingly strained ecological system. Although environmental accounting perspectives are compatible with this view, many within the ‘spaceship earth’ view place greater emphasis on the need to restrict economic growth than environmental and natural resource economists do.

We concluded Section 2 by looking at the various services that the environment provides to the economy. These include services relating to life support, resources for production, acting as a waste sink, and amenity.

UNIT SELF ASSESSMENT QUESTIONS

uestion 1

Fill in the missing words.

Since many resources that are classed as ______can ______themselves given sufficient time (millions of years), and since many ______resources do not do so due to ______these resources are sometimes referred to, respectively, as ______and ______.

uestion 2

Match the correct definitions.

(a) Critical zone resources (i) Flows that are indefinitely renewable if use remains at or below their capacity to reproduce or regenerate, but can effectively be mined like a mineral stock if the rate of use exceeds the rate of natural replenishment

(b) Non-critical zone resources (ii) Flows that remain renewable irrespective of human activity

Q uestion 3

Match the correct definitions.

(a) Natural resource economics (i) Concerned with identifying resource allocations that maximise the aggregated benefits to society as a whole

(b) Environmental economics (ii) Focused on a broader range of services than natural resource economics

(d) Classical economics (iv) More concerned with natural resource limits than early neoclassical economics

(e) Neoclassical economics (v) Related to environmental economics and using the tools of neoclassical welfare economics

(f) Welfare economics (vi) Rooted more in ecological science than in economics

uestion 4

Label the diagrams below using the following: the cowboy economy, spaceship earth, economy, raw materials, waste, recycling, inputs, outputs.

Source: unit author

uestion 5

Label the diagrams below using the following: economy, environment, consumption, waste, pollution, health & amenity, raw materials, stocks and flows, production

ECONOMY waste pollution production

KEY TERMS AND CONCEPTS ecological economics inspired by ecology rather than traditional economics environmental economics broader than natural resource economics, but rooted in traditional economics flow resources can be naturally renewed within a sufficiently short time- span to be of relevance to decision-makers irreversibility central to assessing the risks of environmental damage neoclassical economics foundations for modern economics non-renewable resources resources, such as minerals or oil which are non-renewable within an economic time frame renewable resources resources such as timber or solar energy which are renewable – the flow of services from these resources can potentially be harvested indefinitely reserves the supplies of materials or energy which are exploitable in political, economic and technical terms under current conditions. Total stocks are usually greater than reserves steady-state equilibrium exists when a stock size and flow of services is sustained over an indefinite period of time stock resources have taken millions of years to form and so, from an economic perspective, may be considered as ‘fixed’ in supply substitutability extent to which man-made capital can substitute for natural capital welfare economics branch of neoclassical economics concerned with public policy decisions