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Natural resource economics focuses on the effi cient access to the improved air—so people will free ride. Free use of renewable and nonrenewable resources, with riders are those who benefi t from a good for which they particular emphasis on the effi cient use of resources do not pay. over time. Markets may fail to allocate resources In a world with limited resources, the overall welfare effi ciently in the presence of externalities and public of society is maximized when resources are allocated to goods. In such cases, economists favor incentive- their highest-value uses; that is, there is no other combi- based policies using market approaches over govern- nation of resources that can provide for more of society’s ment command-and-control standards. Economically needs. In this situation, economic effi ciency is achieved. effi cient outcomes may or may not lead to sustainable Markets for goods and services function best when, outcomes. among other conditions, there are no externalities or public goods characteristics. When these conditions are not met, the resulting allocation of resources will be eco- conomics is the study of the allocation of scarce nomically ineffi cient and there is market failure. resources. Under certain conditions, private markets E Goods with negative externalities are overproduced allocate resources effi ciently. Economic effi ciency denotes and overconsumed (compared to the socially optimal getting maximum value for society from our scarce level) because the market ignores the costs imposed on resources. When these conditions are not fulfi lled, mar- third parties. Likewise, goods with positive externalities ket failure occurs: that is, the market outcome does not are underprovided because the market ignores the bene- achieve maximum social welfare, the outcome most fi ts received by third parties. Th e economist A. C. Pigou desired by society. When market failure takes place, a (1877–1959) proposed that externalities can be internal- case can be made for government (the public sector) to ized by the market through the use of taxes on negative improve the allocation of resources. But government fail- externalities or subsidies on positive externalities. A ure can also occur; government objectives need not result Pigovian tax internalizes the external cost to society, in effi cient allocation of resources. thereby reducing the amount produced and consumed, as well as generating revenue that can be used to off set other Externalities, Public Goods, taxes, providing what is termed a double dividend . and Market Failure Mainstream (or neoclassical) natural resource economics can be consistent with economically effi cient out- Natural resources are subject to market failures, particu- comes that do not result in sustainable outcomes. For larly due to externalities and public goods. Externalities instance, if sustainability requires us to leave the future occur when transactions between two parties impact a with at least as much oil as we have today (an example of third, uninvolved party. For example, neither automo- strong sustainability), economic effi ciency will not achieve bile drivers nor car companies voluntarily consider the oil market sustainability. Even if sustainability allows for external cost of auto emissions on everyone else. the reinvestment of funds into human-made capital Furthermore, clean air is a public good—it benefi ts (known as weak sustainability), for instance by investing everybody and there is no way to exclude anyone from funds from selling oil today in alternative fuels or other

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forms of wealth set aside for future generations, economic quality. As compared to revealed preference methods, eﬃ ciency still will not generally achieve even this less stated preference methods suﬀ er from being hypotheti- demanding form of sustainability. cal, and so surveys must be designed carefully if they are to elicit truthful information.

Valuing Nonmarket Goods Common Pool Resources (CPR) People value the preservation and use of goods. In mar- Natural resources often are not of a nature that can be kets for goods or services, supply and demand determine privately owned, and access to them cannot be controlled; prices. In a market that fully internalizes externalities law refers to “fugitive” resources, such as groundwater (along with other conditions) those prices will lead to and open-ocean fi sheries, that move and to which prop- effi cient use. But many natural resources are not traded erty rights are diffi cult to assign and enforce. Like public in the marketplace, so their prices are not determined by goods, it is diffi cult to limit access to these a market. Th e value of clean air, ecological sys- common pool resources (CPRs), but like tems, and species diversity are among non- private goods, there is a degree of traded goods. Economists distinguish rivalry in use. If access is not limited, between use values and nonuse values . Use overuse leads to what Garrett Hardin values, such as fi shing in a mountain in 1968 referred to as the tragedy of the stream, can be inferred from revealed commons . Th is outcome results when preference methods that can be observed individual self-interest drives all par- in the decisions people make. For ties to compete to appropriate (to harvest example, houses located by trout- or extract) as much of the resource fishing streams may sell for as possible, rather than at a sus- more than similar houses that tainable level. Th is outcome is are not next to a stream. Th e a form of a “prisoner’s dilemma,” decision to stock the stream where individual self-interest with fi sh may increase a house’s and group interest do not value still more. Th e hedonic coincide. method is a revealed preference Without an eff ective man- method that typically compares agement structure for the CPR, housing prices at varying distances it will be overharvested, eventu- from a natural resource. Th e diff erence ally leading to its collapse. It is in price is an estimate of the value peo- possible for a community or the ple place on having access to that natu- appropriators themselves to work ral resource. It has also been used to together to manage the resource in a compare housing prices in locations with dif- sustainable way. Elinor Ostrom, who ferent air quality, among other applications. shared the Nobel Prize in Economics in Another widely used revealed preference method is the 2009, suggested that this arrangement has historically travel cost method . Information on visitor travel cost to a been successful in relatively small, cohesive communities national park or forest, and the corresponding number of where cooperation and enforcement are possible without visitors from diff erent locations, serves as a way to assess government intervention. Where there are no clearly the demand for that resource. defi ned property rights, and no eff ective management But even if we never use them, we may value resources. structure, government regulation is needed. Such nonuse values include existence value , where we value the resource even if we never expect to use it. We may place a value simply on the existence of the Grand Allocating Natural Resources Canyon, even if we have never visited. Similarly, we may value preserving species independent of any use they may Traditional natural resource economics focuses on using have for human beings. To estimate nonuse value, we markets and prices to determine the economically must use stated preference methods. Th e most common effi cient allocation over time, as with nonrenewable method is a survey approach known as contingent valua- resources, or the effi cient rate of appropriation, as with tion . People are surveyed about their willingness to pay renewables. In some cases, such as renewable resources (WTP) to preserve a nonmarket resource, such as the including forests and fi sheries, the effi cient outcome also Grand Canyon, an endangered species, or improved air achieves sustainability. In cases of nonrenewable and

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nonrecyclable resources such as fossil fuels, the effi cient Nonrenewable, Recyclable Resources outcome will not achieve strong sustainability, and it may not achieve weak sustainability. Many nonrenewable resources are recyclable, such as metals. Recycling extends the lifetime of a nonrenewable resource, but it may or may not be economically effi cient. Nonrenewable, Nonrecyclable Resources New (virgin) material may be less expensive than recy- Nonrenewable resources are natural resources of a fi nite cled material if the costs associated with acquiring and quantity that are exhaustible, such as fossil fuels and recycling used materials exceed the cost of mining and some minerals. At least since Th omas Robert Malthus processing. Th e marginal cost (the cost to produce one (1766–1834), who predicted that population growth more unit) of extracting virgin material rises as resources would outrun food supplies, there has been a concern are depleted (what remains may be more diffi cult to that we will deplete such resources. While Malthus’s pre- extract and may be of lower quality, requiring more pro- diction did not prove correct, modern day neo-Malthu- cessing); eventually this leads to more production of recy- sians such as Donella Meadows, Dennis L. Meadows, cled material as it becomes relatively less expensive. and Jørgen Randers (2004) apply similar reasoning to the Th e extraction of virgin material usually causes envi- premise that population growth generates excessive pol- ronmental damage. Mining activities can destroy plant lution and depletes natural resources. and animal habitats and involve the use of toxic chemi- Economists generally reject this view, following the cals that can seep into groundwater, causing harm to approach fi rst shown by Harold Hotelling (1931). When a ecosystems as well as to human health. Processing of raw natural resource is privately owned, a profi t-maximizing material into its fi nal form requires energy that primarily owner will determine the rate of extraction that maxi- comes from the burning of fossil fuels, which also mizes present value of the resource over time ( dynamic effi - releases toxins and other pollutants. Market prices that ciency ). When discounting future revenue (to the owner of do not internalize environmental costs lead to overcon- that resource, a dollar received in future years is not worth sumption and overextraction of the material, as well as as much as a dollar received now), the price of a resource less recycling. extracted in the future must be higher than the price now. So over time, the quantity available for sale in each time Renewable, Depletable Resources period decreases, resulting in gradually increasing prices. Th e resource will decline, but the increasing price will Renewable, depletable resources, such as forests and fi sh- likely incentivize the development of alternatives. eries, are constantly created or regenerated in nature but Many geologists believe that the world has now or can be depleted if not managed carefully. Th ese resources soon will pass peak oil production; again, economists do have some natural rate of regeneration that is infl uenced not share this concern. Even if oil has peaked, substitutes by the current size of the stock (population) and the will emerge. Th e idea that a given natural resource can be amount of biotic inputs (nutrients, sunlight) in the substituted with human-made capital (referred to as weak ecosystem. sustainability ), thereby reducing or eliminating demand Th e maximum sustainable yield (MSY) occurs at a for that resource over time, is controversial. In 1980, the point where the balance of population versus the amount economist Julian Simon and the ecologist Paul Ehrlich of available inputs allows for the maximum rate of regen- entered into a public wager over whether the prices of fi ve eration. Th is yield occurs when the population is signifi - particular metals would increase or decrease by the end cantly below the carrying capacity of the ecosystem. As of the decade. Ehrlich believed the prices would rise due the population approaches the carrying capacity (i.e., the to the accelerating pace of world population growth and population fi lls the available land), the limited inputs the associated increase in demand for those commodity become scarcer, slowing the rate of regeneration. A sus- metals. Simon believed that technology would enable tainable rate of harvest can be as high as the MSY; if it some degree of substitution away from those commod- goes above that rate, eventually the resource stock will ities, thereby avoiding an increase in demand and collapse. Th e economically effi cient rate of harvest is prices. In 1990, the average price of the fi ve metals had where the value of one more unit harvested (marginal decreased, implying that substitution had occurred, revenue product, or MRP) is equal to the cost of harvest- keeping demand for those metals stable or lower than ing that unit (marginal eff ort cost, or MEC). Th is rate is the 1980 level (Hackett 2006, 117). But many question sustainable. In fact, the effi cient rate is usually less than the degree to which technology can substitute for natural the MSY, because harvesting at the MSY, where the resources and argue that some resources are not replace- stock size is smaller and more spread out, may result in a able with human-made capital, or that some resources situation in which the cost to catch another fi sh (MEC) lend themselves to easier substitution than others. is higher than its value (MRP).

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As CPRs, ocean capture fi sheries—wild ocean fi sher- rigs, kayakers, and so on—could take place in diff erent ies in which the stock is not controlled in any way and so parts of the ocean. must be “captured”—are vulnerable to the tragedy of the commons because they cannot be privately owned. Some Water approaches to preserving the resource include setting limits on the total allowable harvest, placing specifi c Water has characteristics of both renewable and nonre- restrictions on what type of equipment can be used (e.g., newable resources. It is constantly recycled by the natu- limitations on the type of traps or nets used for fi shing), ral water cycle, yet underground aquifers used to meet and rules on minimum size or age of resources that can human needs can take so long to replenish that they are be harvested. While these approaches can preserve the eff ectively nonrenewable. Water management must resource stock, they result in high production costs and consider both the supply of and demand for water. thus are not economically effi cient. Supply includes underground aquifers and surface Another common approach is to establish harvest fl ows, which can be captured with dams. Aquifers are seasons, but this method often results in a derby where recharged by rainfall, but the with- all appropriators race to harvest as much as drawal rate usually exceeds the possible before the season ends. Th is recharge rate. Th is is the case in incentivizes parties to invest in some of the most water-stressed larger equipment, resulting in less regions of the world: Yemen efficiency as costs rise due to relies heavily on underground overcapitalization. aquifers that get virtually no Individual quotas are an recharge from rainfall, and will be approach preferred by econo- depleted at the current rate of with- mists. Th ey can be more eff ec- drawal by 2025 (Naje 2010). tive at keeping the rate of Historically, water manage- harvest at the economically effi - ment has been approached cient level, while avoiding derby from the supply side, mostly conditions and overcapitalization. by building dams that capture Quotas are given away or auc- floodwater that otherwise tioned by a government to indi- would have been unavailable vidual parties, limiting the for human use. Desalination amount of resource each party is used in some places to turn can harvest and ensuring seawater into drinking sustainability. Individual water, but due to its rela- tradable quotas (ITQ ) allow tively high cost and energy for the most effi cient fi shers requirements, it will likely to acquire permits from the remain only a small part of over- less effi cient, increasing overall water supply. all effi ciency. Th ere are three primary sources of New Zealand and Australia demand for water: agriculture, industry, have implemented an ITQ system for their ocean fi sher- and consumers. Agriculture makes up about two-thirds ies and set a lower limit on the total available catch of total demand worldwide. Population growth increases (TAC), which resulted in a recovery of the fi sh stock. Th e the need for agricultural output, which increases demand larger fi sh stock, in turn, reduced the eff ort and cost of for irrigation, putting more stress on already overtapped fi shing, increased the size and quality of the fi sh caught, aquifers and rivers. and generated higher profi ts for fi shers. Canada and the More sustainable approaches to water management United States implemented quotas for Northwest are needed. Th e primary problem in most areas is that the Atlantic (the portion of the Atlantic that is bordered by price of water is artifi cially low due to government the northeastern coast of the United States, the eastern subsidies; dams and irrigation systems are usually built coast of Canada, Saint-Pierre et Miquelon [two small and operated with public funds. Pricing water at its French islands located south of Newfoundland], and real marginal cost would incentivize agriculture, Greenland) fi sheries, which also have since seen recover- industry, and consumers to use it more effi ciently ies in fi sh stocks. Th e United States and individual by monitoring and repairing leaks, employing more Atlantic coast states are investigating zoning the ocean, effi cient irrigation techniques, and conserving water determining which activities—fi shing, wind farms, oil at home.

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E n e r g y 0.1 cents per kilowatt-hour of energy produced. Th e external costs of normal operation of nuclear generation Th ere are both nonrenewable and renewable sources of are also very low, though there are potential risks of radi- energy. Traditional fossil fuels, such as coal, oil, and nat- ation pollution. ural gas, are essentially fi xed in supply, having their ori- gins in the decay of ancient organic material. Nuclear Policy energy requires the use of uranium, which also is fi xed in supply. Renewable sources of energy include water, wind, Most energy policy dictates specifi c prescriptions for solar, hydrogen, and biomass. conforming to environmental regulations. Th e require- Each source comes with advantages and disadvan- ment that all cars sold in the United States must have a tages. Coal is the most plentiful and generates electricity catalytic converter is one such policy. Economists gener- with the lowest cost, but its use generates emissions of ally prefer a diff erent approach to a regulation that sulfur, nitrogen oxides, mercury, and carbon. Coal min- requires an emissions standard but does not dictate the ing is also a dangerous profession, and coal extraction specifi c technology to satisfy the law, nor the specifi c damages the landscape, exemplifi ed by mountaintop amount that any one fi rm can emit. removal mining. Cars use combustion engines that run on oil. To a Command-and-Control Economists refer to the lesser extent, utilities use oil as a source for generating traditional form of regulation as command-and-control. fuel. With these uses of oil again come emissions, includ- In its strictest form, a technology standard dictates both ing carbon dioxide. Th ere also are safety and other envi- the standard and how it is to be achieved at the individual ronmental issues as experienced in the 2010 explosion of fi rm level, as with the catalytic converter. A somewhat the Deepwater Horizon oil platform and resulting oil more fl exible standard is to dictate the standard at the spill in the Gulf of Mexico. fi rm’s level, but allow companies to determine the lowest- Th e storage of nuclear wastes that remain active for cost method of achieving the standard. An example is the hundreds of thousands of years is an issue for nuclear renewable-portfolio standard (RPS), an approach to plants. Nuclear power only now is seeing renewed inter- encouraging the use of renewable fuels to generate est, after several decades without new nuclear plants in electricity that has been adopted in a majority of US the aftermath of a partial meltdown at Th ree Mile Island states, as well as a number of countries including Great in Pennsylvania in 1979, and the Chernobyl disaster in Britain and Chile. Th e RPS requires that an increasing the former Soviet Union in 1986. percentage of energy will be produced by alternative fuels Concerns about emissions, especially carbon emissions over time but leaves flexibility about the mix of that are associated with climate change, also drive the alternatives. A similar idea led by Germany that has been interest in alternatives. Renewable sources cost more per adopted in many countries throughout the world is the unit of energy, but their costs have been declining. Wind feed-in tariff (FIT) that requires utilities to buy is the most rapidly growing alterative, with costs drop- alternative fuels at predetermined prices based on the ping quickly to near-competitive levels. But there is cost of production. Economists prefer still more fl exible increased opposition to establishing wind farms in loca- approaches. tions where they impede views. Solar and biomass, while generally clean, do require I n c e n t i v e - B a s e d Incentive-based (IB) approaches large amounts of land and have externalities of their own; set an overall standard but do not dictate standards for there are wastes associated with the manufacture of sili- individual fi rms. Taxes and trading are the dominant IB con plates used in solar energy, and even burning biomass approaches. “Green” taxes are widely used in Europe, but can give rise to toxic wastes. not in the United States. Hence, gasoline prices are much A report from the National Research Council (2010) higher in Europe due to taxes that encompass societal estimated the external damages from burning coal to costs from emissions and national security costs. Th e generate electricity in the United States in 2005 were United States has been very resistant to higher taxes and about $62 billion, averaging about 3.2 cents per kilowatt- has instead favored a trading approach often denoted as hour of energy produced. Th ese fi gures, however, do not a cap-and-trade system. include costs associated with climate change. Natural gas Th e most developed cap-and-trade system is used for has the lowest external costs of the fossil fuels, and oil is sulfur emissions from electricity generation, passed as intermediate between coal and natural gas. External part of the 1990 US Clean Air Act amendments. Under damages from wind power and biomass (including life this system, the government creates requisite permits that cycle costs associated with manufacturing) are much a business needs to release sulfur. To date, these permits lower compared to fossil fuels, perhaps on the order of have typically been given away to fi rms, with the number

324 • THE BERKSHIRE ENCYCLOPEDIA OF SUSTAINABILITY: NATURAL RESOURCES AND SUSTAINABILITY

of permits based on emissions prior to the start of the ecology and, to some extent, ecological economics use program. Firms can buy and sell these permits. Firms physical units. So along with the development of better- that can reduce their emissions at low cost can sell excess developed and better-accepted dollar measures of natural permits, while fi rms with higher costs may fi nd it advan- resources, there is the desire to establish tools that can be tageous to buy additional permits rather than cut emis- used with physical measures that may not be convertible sions. Th e overall standard is achieved at a lower cost into dollar terms. A healthy ecosystem may be character- than with command-and-control by allowing fi rms that ized by the presence of indicator species, or a corridor can reduce emissions at the lowest cost to do so, with allowing species to migrate. Th ese physical measures may smaller reductions by fi rms with higher abatement costs. have no dollar equivalent. Europe has introduced a carbon-trading market. US leg- Th e best known measure of overall well-being is gross islation, however, has not been passed to introduce a cap- domestic product (GDP). Alternatives such as Green and-trade system as of mid-2011. GDP account for factors such as the depreciation of natural capital, where the stock of natural resources is viewed as a type of capital. Th e Daly-Cobb (1994) Index Outlook for the Twenty-First of Sustainable Economic Development (ISEW) sug- Century gests that for some regions where GDP continues to rise, ISEW is declining. We can expect attempts to make Natural resource economics developed as an extension of greater use of physical measures via satellite accounts, as mainstream neoclassical economics. While natural resource urged by ecologists. Such accounts would track the phys- economics and its close relation, environmental ical stock of natural resources, and additions and economics, extended mainstream economics deletions. with a careful focus on market failures due Th ere are also growing calls for plural- to externalities and public goods, neither ism (multiple approaches) in economics, ecological considerations nor sustain- such as those by Peter Söderbaum ability are yet part of the mainstream. (2008), rather than exclusive use of Ecological economics has been an the neoclassical approach. Ecologists emerging fi eld since approximately advocate an eclectic approach so that 1990. Yet to date, it is more ecology the measure and approach used for than it is economics. Neoclassical one type of resource can diff er from economics, with its emphasis on effi - methods and indicators used for ciency and social welfare, requires another. dollar values. Th ere have been rela- Natural resource economics tively few attempts to place a dollar emphasizes economically effi cient, value on ecological systems. Th e best- but not necessarily sustainable, use known attempt was by Robert of natural resources. Insofar as sus- Costanza et al. (1997), who estimated tainability is an equity or ethical the value of the Earth’s ecosystem ser- decision about how to treat future vices at $33 trillion annually. Th e estimate generations, economics is not likely to has been criticized for extrapolating small weigh in on its desirability, as those issues changes in value, such as an ecosystem in are not the focus of economics. For example, Colorado, and scaling up the value to a global measure. while economics can help determine the benefi ts Michael Toman (1998), in a special issue of Ecological and costs of reducing carbon emissions, that decision Economics dedicated to Costanza’s paper, called the $33 may well be determined by other factors. Even so, eco- trillion number a serious underestimate of infi nity. His nomics can guide the most cost-eff ective way to achieve greater concern is that we need separate numbers for dif- that goal. By allowing economics to play a role, markets ferent parts of the ecosystem, so that we have some guid- will give incentives for alternatives such as alternative ance about what is most worth preserving. We can expect fuel vehicles, carbon sequestration in trees and oceans, increased attempts at valuation and the development of a and many more ideas yet unimagined, by rewarding common framework. Th e evolution will be similar to the billions of people around the globe if they can discover development of cost-benefi t analysis (CBA), which today a better way. has a well-developed foundation. While most of natural resource economics is in the Peter M. SCHWARZ and Michael W. HERRON neoclassical tradition and requires numerical values, Th e University of North Carolina at Charlotte

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