The Economic Approach to Environmental and Natural Resources, 3e By James R. Kahn © 2005 South-Western, part of the Thomson Corporation

Theory and Tools of Environmental and Resource Economics 3e Part I

Introduction Chapter 1

4 In the space of a single human lifetime, society finds itself suddenly confronted with a daunting complex of trade-offs between some of its most important activities and ideals. (p.1) Economics – the study of how to make trade- offs; the science of the allocation of scarce resources. There is difficulty in confronting trade-offs between environmental preservation and other economic and social activities. The longer we defer decisions, the more stark the trade-offs.

5 Alternative Definitions of Economics Lionel Robbins (1932) An Essay on the Nature and Significance of Economic Science: “Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses.” Ludwig von Mises (1948) Human Action: “Economics in the narrower sense is the analysis of the market phenomena. … the analysis of those actions which are conducted on the basis of monetary calculation. Market exchange and monetary calculation are inseparably linked together.”

6 Trade-offs occur at every geographic scale We are experiencing losses of habitat and the collapse of many renewable resources including:  The majority of our most important global fisheries.  Massive losses of tropical forests.  Rapid die-off of coral reefs.  Extensive losses of wetlands.  Conversion of grasslands and other ecosystems to desert at an alarming rate.

7 Goals of this textbook Develop a framework for examining environmental problems and recognizing what constitutes a set of feasible solutions. Attempt to show how economics can be part of this framework.

8 A Taxonomy of Resources Three categories of resources defined in this book include:  Natural Resources  Physical Resource Flows  Environmental Resources

9 A Taxonomy of Resources Natural Resources These are provided by nature and can be divided into increasingly smaller units and allocated at the margin.  Examples include: barrels of oil, cubic meters of wood, kilograms of fish. Stocks of natural resources may be fixed or have regenerative capability. These resources are divided into renewable resources and exhaustible resources.

10 A Taxonomy of Resources Physical Resource Flows These resources do not exist as a stock, but have never-ending flows.  Examples include: solar energy, wind power, tidal power and geothermal power. Our consumption of these resources has no effect on the stock or our ability to consume them.

11 A Taxonomy of Resources Environmental Resources Resources provided by nature that are indivisible.  Examples include: an ecosystem, an estuary, and the ozone layer. These resources can be examined at the margin in terms of quality but not quantity. These resources are not consumed directly, but people consume the ecological services provided by these resources.

12 A Taxonomy of Resources Ecological Services Flow from environmental resources. Ecological service is a function of quality of the environmental resource. These services are provided to both ecosystems and social systems.  Clean air and water support basic biological functions.  Clean air and water provide important recreational and aesthetic benefits.  Clean water contributes to economic production processes.

13 A Taxonomy of Resources Ecological Services promote the stability and resilience of the ecosystem that generates them. It is important to develop environmental policy that not only reduces the direct impact of pollution on humans, but also protects our environmental resources and the flow of ecological services.

14 Why Study Environmental and Resource Economics? Study of natural sciences is not sufficient to completely analyze problem because these sciences do not include human behavior. Study of economics does not recognize that optimal allocation of environmental resources has implications for future choice. Many decisions regarding environmental resources are irreversible. Market failure is an important characteristic of many environmental issues. Optimal allocation requires understanding the whole ecological system and how it responds to changes in both ecological and economic systems.

15 Figure 1.1

16 Figure 1.2

17 Figure 1.3 Physical and Natural Environment Social System Economic System

18 Why Study Environmental and Resource Economics? The social and economic systems are not separate from the physical and natural environment, but contained within it. A good understanding of environmental and resource economics requires the development of an understanding of how physical and natural sciences contribute. Economics becomes even more significant when integrated into this interdisciplinary overview.