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P122 Natural Resource Economics

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P122 Natural Resource Economics Centre for Development, Environment and Policy P122 Natural Resource Economics Prepared by: Emmanuelle Quillérou, Laurence Smith and Michael Stockbridge Based on earlier versions by Jamie Morrison and Michael Warner © SOAS | 3741 Natural Resources Economics Module Introduction ABOUT THIS MODULE This module develops a rationale for, and explains the methodologies used in, the application of economic theory to the allocation of natural resources. The main emphasis is placed on enhancing the learner’s ability to evaluate critically a rapidly growing, but technical, area of the economic literature. In order to achieve this, the rationale for the use of economic concepts, theory and models is first developed. Using a series of resource sectors as examples, a number of economic models are then explained in detail in a way that is intended to raise the learner’s confidence in the interpretation and assessment of various policy insights that are derived from the models. Practical policy applications are used throughout the module in order to bridge the gap between theory and practice. Also whilst developing and applying the microeconomic applications in depth, a number of ‘departures’ from basic models are explored throughout the module in the context of the ‘sustainable development’ debate. STRUCTURE OF THE MODULE This module starts by introducing key concepts in natural resource economics. After a brief classification of natural resources we look at the concept of sustainability and the intellectual foundations of natural resource economics, identifying what distinguishes the discipline from environmental economics and ecological economics. This is followed by an examination of the interconnections between the economy and the environment, including the services that the environment supplies to the economy. When applied in research and policy analysis natural resource economics relies on empirical evidence and is a quantitative discipline. Thus the second unit of the module takes time to introduce and refresh the methods and tools of natural resource economics thoroughly including the application of mathematics and spreadsheet-based modelling. Next the module examines the concepts of sustainability and sustainable development and reflects upon the various debates and arguments that surround these contentious concepts. The first section of Unit 3 provides a broad introduction to the subject noting the difficulties of defining sustainability and highlighting the different perspectives from which the concept can be studied and analysed. The next section narrows the focus down to an economic perspective, looking at some basic economic models of sustainability, including models of optimal growth. The final section concludes by looking at how sustainability is conceived and measured in the ecological sciences and considers what insights ecology might hold for the limits to growth. The theoretical foundations that underpin most of the economic analysis that takes place in relation to natural resource management originate from welfare economics. The module reviews some of the key philosophical assumptions that inform economic approaches to welfare analysis and builds on this by explaining what economists typically mean by efficiency and how efficiency relates to the concept of welfare and equity. It also looks at why competitive markets are viewed as a benchmark for achieving efficiency and also at why markets are not always able to deliver efficiency. This leads to a consideration of alternative non-market arrangements for allocating resources, in particular, other institutions and an assessment of how they compare in efficiency terms. © SOAS CeDEP 2 Natural Resources Economics Module Introduction The concepts and tools examined in the first parts of the module are then applied to analysis of the exploitation and management of different natural resources. First the focus falls on the economic characteristics of non-renewable natural resources and what distinguishes them from renewable resources. Key concepts and ideas reviewed include resource rents and dynamic efficiency, and the Hotelling model which serves as the foundation for much of the economic analysis in this module. Conclusions are drawn about the concept of economic scarcity and its drivers for the non-renewables sector. Moving on, the module then explores the bio-economic characteristics of critical zone renewable natural resources. It examines the complex relationships that policy-makers need to take into account in developing policy that ensures efficient resource allocation. For this, static and dynamic models that aid the formulation of appropriate policy are examined, along with their key limitations. Continuing the analysis of renewable resources, the module covers the resources provided by forests and other wooded land. Plantation forests are renewable resources but have a range of characteristics that differentiate their assessment, management and utilisation from other renewable resources such as fisheries. Natural and undisturbed forests provide a resource that has conventionally been regarded as a renewable resource in the past, but when multiple non-timber benefits and ecosystem services are considered discussion centres on what is irreplaceable and thus a non-renewable resource, at least in the short and medium term. Consideration is given to the policy mix necessary to achieve more socially optimal management of forest resources in meeting the long-term goals and needs of society. Finally, the module critically assesses the attempts that have been made by economists to modify national income accounting conventions so as to create a measure of sustainable income. The resulting guidelines for ‘environmental accounting’, also known as ‘natural resource accounting’ and ‘green accounting’ are summarised and assessed in relation to the goal of sustainable development. Alternative measures of ‘genuine saving’ or ‘genuine investment’ that have been proposed as indicators of sustainable national income and welfare are also reviewed. Thus the last unit considers how economists have explored whether measurement of wealth can be made more holistic by taking into account all forms of capital, including natural, human and social capital. Parallel approaches that involve the compilation and use of biophysical indicators of sustainability without integration into national economic accounts are also considered. © SOAS CeDEP 3 Natural Resources Economics Module Introduction WHAT YOU WILL LEARN Module Aims The specific aims of the module are: To explain the rationale for the use of economics in informing natural resource allocation decisions. To develop skills in using economic theory to analyse critically natural resource problems. To give confidence in accessing a specialised literature and quantitative approaches, in particular in applying spreadsheet applications for the latter. To assess the limitations of, and possibilities for, extending the orthodox applications of economic theory by comparing the outcomes with insights derived from alternative paradigms. To explain the economic approach to the measurement of sustainable development and the incorporation of sustainability criteria in economic policy. Module Learning Outcomes By the end of this module, students should be able to: discuss the extent of and critically appraise factors contributing to, natural resource scarcity develop and argue a rationale for the use of natural resource economics theory and methods critically apply the insights gained from the economic methods used in the temporal and inter-temporal theories of resource allocation to the analysis of natural resource use problems critically examine how an economist can contribute to the development of policy that supports sustainable development assess critically the limitations of the neoclassical paradigm in the allocation of resources and demonstrate an in-depth understanding of how current research initiatives are attempting to overcome these limitations. © SOAS CeDEP 4 Natural Resources Economics Module Introduction ASSESSMENT This module is assessed by: an examined assignment (EA) worth 40% a written examination worth 60%. Since the EA is an element of the formal examination process, please note the following: (a) The EA questions and submission date will be available on the Virtual Learning Environment (VLE). (b) The EA is submitted by uploading it to the VLE. (c) The EA is marked by the module tutor and students will receive a percentage mark and feedback. (d) Answers submitted must be entirely the student’s own work and not a product of collaboration. For this reason, the VLE is not an appropriate forum for queries about the EA. (e) Plagiarism is a breach of regulations. To ensure compliance with the specific University of London regulations, all students are advised to read the guidelines on referencing the work of other people. For more detailed information, see the FAQ on the VLE. © SOAS CeDEP 5 Natural Resources Economics Module Introduction STUDY MATERIALS There are two textbooks for this module. ❖ Perman, R., Ma, Y., Common, M., Maddison, D. &, McGilvray, J. (2011) Natural Resource and Environmental Economics. 4th edition. Pearson Education. ❖ Conrad, J. (2010) Resource Economics. 2nd edition. Cambridge University Press. For each of the module units, the following are provided. Key Study Materials Key readings are drawn mainly from the textbooks, relevant academic journals and internationally respected reports. They are provided
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