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Principles of Economic Policy Design for Ecosystem Management Anastasios Xepapadeas

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Principles of Economic Policy Design for Ecosystem Management Anastasios Xepapadeas Copyrighted Material VII.9 Ecological Economics: Principles of Economic Policy Design for Ecosystem Management Anastasios Xepapadeas OUTLINE externality. An externality is present when the well- being (utility) of an individual or the production 1. Introduction possibilities of a firm are directly affected by the 2. Ecological modeling and resource dynamics actions of another agent in the economy. 3. Economic modeling for ecosystem management internalization of an externality. A situation in which 4. Instruments of economic policy and policy the agent who generates the externality bears the design cost that the externality imposes on other agents. market failure. A market failure exists when competi- Ecological economics studies the interactions and coevo- tive markets fail to attain Pareto optimum. lution in time and space between ecosystems and human Pareto optimum. A situation in which it is not possible economies. The rate at which humans exploit or harvest to make someone better off without making some- ecosystems services exceeds what might be regarded as a one else worse off. desirable level from society’s point of view. The conse- production function. A real-valued function that shows quences of this overexploitation are well known (e.g., cli- the maximum amount of output that can be pro- mate change, biodiversity loss and extinction of species, duced for any given combination of inputs. collapse of fisheries, overexploitation of water resources). public good. A commodity for which use of one unit of The objective of designing economic policy is to develop a the good by one agent does not preclude its use by system of regulatory instruments so that the state of the other agents. regulated ecosystems will converge toward the socially state variable. A variable that characterizes the state desirable outcome. The purpose of this chapter is to present of a system at any point in time and space. an approach describing how economic policies might be utility function. A real-valued function that shows that designed to achieve this objective. if a consumer prefers the bundle of goods x to the bundle of goods y, then the utility of x is greater than the utility of y. GLOSSARY control variable. A variable whose values can be chosen 1. INTRODUCTION by a decision maker in order to affect the path of the state variables. Ecological economics studies the interactions and co- ecological economics. The study of the interactions and evolution in time and space between ecosystems and coevolution in time and space between ecosystems human economies. Human economies in the process of and human economies. their operation and development use the flows of ser- economic policy. The intervention by a regulator vices generated by ecosystems. In using these services, through policy instruments in private markets so humans make decisions about the size and the time that a desired market outcome is attained. profile of the harvested flows of ecosystems services as Copyrighted Material Ecological Economics 741 well as about the growth rates of different types of Ecosystems Assessment (2005) classification, these natural capital that are embedded in the ecosystems services may include provisioning services (e.g., food, and that generate the flows of desirable services. Long water, fiber, fuel), regulating services (e.g., climate series of empirical observations have established that, regulation, disease), cultural services (e.g., spiritual, given the institutional structure of the economies (e.g., aesthetic, education), or supporting services (e.g., pri- markets, allocation of property rights, regulatory au- mary production, soil formation). It should be noted thorities, international agreements), the rate at which that some of the above services, mainly the provision- economic agents exploit (or harvest) ecosystems ser- ing, can be used after harvesting the resources stock vices exceeds what might be regarded as a desirable (e.g., fishing, water pumping), whereas others, mainly level from society’s point of view. The consequences of regulating and cultural services, are associated with this overexploitation are well known and include se- the existing stock of the resource (e.g., aesthetic ser- rious interrelated environmental problems such as cli- vices and preservation of a forest). Let F(x(t)) be a mate change, biodiversity loss and extinction of spe- function describing the net growth of the resource cies, collapse of fisheries, and overexploitation of water stock. This growth function embodies factors such as resources. To put this point differently, the market birth, death, migration in case of biological resources outcome, or the outcome stemming from individual (e.g., fisheries), natural inflows, and seepage in case of actions, regarding the harvesting of ecosystem services renewable resources (water resources or accumulation and the time paths of the stocks of natural capital (or of pollutants), whereas in the case of exhaustible re- natural resources) is different from an outcome (or a sources with no discoveries, FðxðtÞÞ 0. If we denote state) that is socially desirable. by h(t) the harvesting of the resource, so that provi- The challenge of designing economic policy in sioning services are used, then the evolution of the re- this context is to develop a system of regulatory in- source can be described by an ordinary differential struments or incentive schemes that will affect the equation (ODE), which can be written, for some initial behavior of economic agents (individuals, firms, na- stock, x0, as: tions) regarding the harvesting of ecosystem services in such a way that harvesting rates and time paths of the dx(t) x_ (t) ¼ F(x(t)) À h(t), x(0) ¼ x > 0: (1) stock of natural capital under the economic policy dt 0 will converge toward the socially desirable outcome. The purpose of this chapter is to present an ap- The most common specification of the growth func- proach describing how these economic policies might tion F(x(t)) is the logistic function, FðxÞ¼rx(1 Àx=K), be designed. where r is a positive constant called intrinsic growth rate, and K is the carrying capacity of the environ- ment, which depends on factors such as resource 2. ECOLOGICAL MODELING AND RESOURCE availability or environmental pollution. If h(t) ¼ DYNAMICS F(x(t)), then the population remains constant because The building of meaningful ecological–economic harvesting is the same as the population’s net growth. models capable of helping in the design of policies for This harvesting rate corresponds to sustainable yield. ecosystem management requires the development of Harvesting rate is usually modeled as population two interacting modules: an ecological module de- dependent or h ¼ qEx where q is a positive constant, scribing the evolution of the state of the ecosystem and referred to as a catchability coefficient in fishery the ways that the interventions of the economic agents models, and E is harvesting effort. The activities of influence this evolution; and an economic module de- economic agents can affect the resource stock, in ad- scribing, in broad terms, the net benefits accruing to dition to harvesting, by affecting parameters such economic agents from the use of the ecosystem’s flow as the intrinsic growth rates or the carrying capacity. of services. Assume, for example, that the intrinsic rate of growth The traditional resource models presented, for ex- and the carrying capacity of the environment for ample, by Clark (1990) or Dasgupta and Heal (1979) the resource described by equation 1 are affected by describe the evolution of the population (or biomass the stock of environmental pollution that accumulatesP n or stock) of a biological, a renewable, or an exhaust- on the ecosystem (e.g., a lake). Let S(t) ¼ i ¼ 1 si(t) ible resource when exploitation (harvesting) by eco- denote the sum of emissions generated by i ¼ 1, ..., n nomic agents takes place. Let x(t) denote the stock of sources at time t, and let P(t) be the stock of the pol- a resource at time t, which generates a flow of valuable lutant accumulated in the ecosystem (e.g., phosphorus services to economic agents. Following the Millennium accumulation from agricultural leaching). Then the Copyrighted Material 742 Managing the Biosphere evolution of the pollutant stock can also be described limiting resource. Then a mechanistic resource-based by an ODE: model with a single limiting factor in a given area can be described by the following equations: _ P(t) ¼ S(t) À bP(t), P(0) ¼ P0 > 0 (2) x_ j(t) ¼ gj(R(t)) À dj, xj(0) ¼ xj0, j ¼ 1, ..., J, where b > 0 is a constant reflecting the environment’s xj(t) self-cleaning capacity. The negative impact of the pol- XJ lutant’s stock on the intrinsic growth rate and the en- _ R(t) ¼ S(t) À aR(t) À wjxj(t)gj(R(t)), vironment’s carrying capacity can be captured by j ¼ 1 functions r(P), r0(P) < 0 and K(P), K0(P) < 0. Then the R(0) ¼ R (5) evolution of the resource is described by: 0 x(t) where gj(R) is resource-related growth for species j, dj x_(t) ¼ r(P(t))x(t)1À À h(t): (3) is the species’ natural death rate, S(t) is the amount of K(P(t)) resource supplied, a is the natural resource removal The ODE system (equations 2 and 3) is an example rate (leaching rate), and wj is the specific resource of a simple ecosystem model in which economic agents consumption by species j. affect the resource stock in two ways, through har- Another important characteristic of ecosystems, in vesting and through emissions generated by their eco- addition to the temporal variation captured by the nomic activities. The agents that harvest the resource models described above, is that of spatial variation.
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