Natural Resource Economics
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NaturalResourceEconomics_Schwarz.indd Page 319 11/10/11 9:35 AM user-f494 /201/BER00001/Enc82129_disk1of1/1933782129/Enc82129_pagefiles Natural Resource Economics 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 eco- nomics 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 319 (c) 2012 Berkshire Publishing Group. All Rights Reserved. NaturalResourceEconomics_Schwarz.indd Page 320 11/22/11 7:49 PM user-f494 /201/BER00001/Enc82129_disk1of1/1933782129/Enc82129_pagefiles 320 • THE BERKSHIRE ENCYCLOPEDIA OF SUSTAINABILITY: NATURAL RESOURCES AND SUSTAINABILITY 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 (c) 2012 Berkshire Publishing Group. All Rights Reserved. NaturalResourceEconomics_Schwarz.indd Page 321 11/10/11 9:35 AM user-f494 /201/BER00001/Enc82129_disk1of1/1933782129/Enc82129_pagefiles NATURAL RESOURCE ECONOMICS • 321 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.