Natural Resource and Environmental

Economics
 Natural Resource & Environmental Economics
(Econ 2091)
Outline
1. Introduction
2. Some Issues on the Environment & Development
3. Efficiency, Property Rights, Market Failure & the Environment
4. Natural Resources
5. Economics of Pollution Control & Environmental Policy
6. Valuation of the Environmental Resources
7. International Environmental Issues & Economics of Climate Changes
 Chapter one: Introduction
1.1. Unit Introduction
1.2. Historical development of the subject matter

1.3. Inter-linkage b/n the environment and the economy

1.4.The two views for the prospects in the environment

Unit Introduction

 A "standard" economic approach considers the economy as consisting of flows

of goods and services b/n firms and hhs, influenced by the policy of
governments
 Natural resource & environmental economics adds to this;
 the flow of resources from the environment (energy, raw materials, & so on); &
 the flow of waste products passing to the environment (various forms of
pollution, solid waste, & so on)

 Natural resource & environmental economics has come into existence due to
the realization that
 humans can no longer ignore the effects they have on the environment through
using resources and creating pollution,
 The "standard" model is fine for
 a world with low population,
 abundant resource, and
 no lasting environmental damage,
 but we no longer live in such a world

 More recently, a slightly different approach has arrived:

 ecological economics goes further than natural resource and
environmental economics,
 in recognizing not only the flows between the economy and the
environment,
 but also the complicated interactions and dynamics which can arise
between human activity and ecosystems as a whole
 Concepts of the subject matter
 What is Environment?
 Env‟t is surrounding influences; or all the external factors influencing the
life & activities of people, plants, & animals
 What is Natural Resource and Environmental Economics?
 is the study of environmental problems with the perspective & analytical
ideas of economics
 It focuses on how economic activities affect our natural & environmental
resources– the atmosphere, water, land & an enormous variety of living
species
 Environmental economics takes into consideration issues such as
 conservation & valuation of natural resources,
 market failure (externality), pollution control, waste management and
recycling & efficient creation of emission standards
Natural resources:
 are parts of the environment considered as a factor of production (forest,
natural gas, minerals, fishery, water & etc)
 are gifts of nature; living & non-living things, exploited or can be exploited by
human beings as a source of food, raw materials, energy and etc

 Natural resources are classified in two broad categories;

These are: non-renewable resources & renewable resources
 Non-renewable resources
 are depletable (exhaustible) resources
 Their supply cannot be increased in at least in the short run
 They exist as stocks: e.g. oil, natural gas, minerals, metals, clay & etc
 Renewable resources
 are non depletable or non exhaustible resources
 Their supply can be increased or decreased with time
E.g. Forest, wildlife, Rainfall, solar energy & etc
(use dependent) (use independent
 Environmental economics &Natural resource economics
(In Narrow definition):
 Environmental economics is concerned with welfare economics, i.e.,
the economics of pollution
valuation theory and Brown issues
environmental policies
 Natural resource economics is concerned with optimal utilization of natural
resources ( Green issues)
In Broad definition:
 environmental economics is concerned with both Green and Brown issues
 Hence, in the broad sense environmental economics is not distinct from its sister,
discipline natural resource economics
 Natural resource and environmental economics is distinct from ecological
economics
 in that it adheres more closely to conventional, neoclassical economics
 i.e, it emphasizes the desirability of attaining environmental objectives by
means of using market mechanisms,
 like adjusting price signals, in order to influence the behavior of households
and firms
 however, there is a significant overlap between natural resource and
environmental economics and ecological economics
1.2. Historical development of the subject matter
 how the issue of resource and environmental economics came to vision from
early classical writings to welfare economists
I. Classical &Neoclassical economics
 In the writings of the classical economists these were a major concern
 These issues are central to the work of Adam Smith,
 Smith was the first writer to systematize the argument for the importance
of markets in allocating resources,
 although his emphasis was placed on what we would now call the dynamic
effects of markets
 A central interest of classical economist was the question of what determine
standards of living and economic growth
 Natural resource was seen as important determinants of national
wealth and its growth
in the 1970s natural resource introduced in to neoclassical economic
growth models,
 neoclassical economists first investigated the efficient and optimal
depletion of resources
II. Welfare economics
 The problem of externality and market failure challenged the writings of
welfare economists
 The problem of pollution is a major concern of environmental economics
 It first attracted the attention of economists as a particular example of the
general class of externalities
 Early work in the analysis of externalities and market failure is to be found
in Marshal (1890)
1.3. Economic activity and the environment
 Economic activity takes place within, the earth and its atmosphere
 environment is viewed as a composite asset that provides a variety of
services

 It is a very special asset, because it provides the life support systems that
sustain our very existence,
 It provides the following services for the economy:
 raw materials, which are transformed in to consumers‟ products by the
production process, and energy, which fuel this transformation
 It absorb waste products from the economy or serve as sink of wastes/
residuals of production & consumption, i.e.
 the raw materials and energy used in the production process return
to the environment as waste products

 It also provides services directly to the consumers i.e

 the air we breathe,
 the nourishment we receive from food and drink and
 the protection we drive from shelter and clothing

 are all the benefits we receive either directly or indirectly from the
environment.
 It provides us aesthetic values, i.e it provides us with varieties of
amenities for which no substitute exists (recreational service etc)
I

Inter-linkage b/n the Economic system & the environment

THE ENVIRONMENT
Energy AIR
POLLUTION
Firms
SOLID WASTE
(Production)

THE ECONOMY Outputs

Inputs

WASTE

HEAT
Households
water (Consumption)
WATER

POLLUTION

Raw
Materials
 The knowledge of the relationship between the environment and the
economy help us to design an appropriate policy that prevents undue
depreciation of the value of these special assets, the environment,
 so that it may continue to provide aesthetic and life sustaining services

 In line with this fact, modern ecologists have the stand point saying that the
environment possesses a unique “carrying capacity” to support humans, and

 once that capacity is exceeded widespread ecological destruction occurs

with disastrous consequence for humanity.

 The focus is no longer on individual societies but on the survival of the

planet
 For several decades economists have been concerned with topics such
as exhaustible resource and pollution,
 but during the last decades it has become a researchable area
 As a result,
 we have come to better understand the r/p b/n humanity and the
environment and
 how that relationship affects, and is affected by economic and
political institutions.
 With regard to the r/p b/n natural & environmental resources and
economic activities there are two viewpoints (prospects)
These are:
 Optimistic &
 Pessimistic view of points
I. The Basic Pessimist Model
 Herman Daly, in his book, „Steady-State Economics‟ suggested that
“enough is best”
 arguing that economic growth leads to environmental degradation and
inequalities in wealth

 In 1972 ambitious study published under the title “The limit to Growth” &
with the model that concluded:
 Within a time span of less than 100 years
 society will run out of the non-renewable resources
 as the resources have been depleted,
 an impulsive collapse of the economic system will result,
 manifested in massive unemployment,
 decreased food production, &
 a decline in population as death rate soars

 They argued that

 no smooth transition,
 no gradual slowing down of activity; rather,
 the economic system consumes successively larger
amount of the depletable resources until they are gone
 the system is overshoot and collapse
The Limits- to- Growth Standard Run (State of the world model)

Resource
Population

Food
per
capita Pollution

Industrial
output per
capita

1900 time 2100

 II. The Basic Optimistic Model
 As a reply for the limits to growth model,
 Herman Khan and his associate presented an alternative vision in a book
titled “The Next 200 years : A Scenario for America and the world”.
 This vision is an optimistic one based on
 on evolution of a form of technological progress that serves to push back the
natural limits until they are no longer limiting;
 new sources of energy,
 overcome any resource limitations, and
 control pollution problems
 The model concluded that:
 The future path of population growth is expected by Khan and his associates
to approximate an S-shaped logistic curve
The Khan perspective on prospective of Humanity (in fixed $1975 )

2176:
15 billion people
$300 trillion GNP
$20,000 per capita
1976:
4.1 billion People
$3.5 trillion GNP
$1300 per capita

1776:
750 million people
$150 billion GNP
$200 per capita