Natural Resources Economics Overview

Natural Resources Economics

• Economic and environmental systems interact significantly. Increasing numbers of economists, scientists, and resource managers realize the need for interdisciplinary approaches to understand these interactions and create effective public policy.
• Economic systems derive many valuable inputs, some commodified, some free, from ecological, hydrological, geological, atmospheric, and Earth's other systems. Essential ecosystem services (like nutrient cycling, wetland functions, and the hydrological cycle) hold economic value, and methods are being developed to quantify this value.
• Renewable resources are replenished through ecological processes (forests, fisheries). They can be depleted by overuse.
• Nonrenewable resources do not regenerate through ecological processes, at least on a human timescale (oil, coal, minerals).

Renewable and Nonrenewable Resources

• Renewable resources, such as forests and fisheries, are replenished through ecological processes. They can be depleted through overuse.
• Nonrenewable resources, such as oil, coal, and mineral ores, do not regenerate ecologically, at least on human timescales.

Expanded Circular Flow Model

• Natural resources and solar energy are essential inputs to economic processes. Human well-being relies on these resources, although standard economic metrics (like GDP) often understate their importance.
• Ecological systems have their own circular flow, driven by physical and biological laws, not economic ones. One net input is solar energy, and one net output is waste heat. Other flows are recycled or contained within the planetary ecosystem.
• The economic system is unbounded in theory but limited in practice by the availability of natural resources and the environment's ability to absorb waste and pollution. The size of the economy relative to available natural resources is critically important.

Economic Activity and Public Policy

• Economic activity can negatively affect the functional integrity of natural systems, though impacts can often be reduced or eliminated via effective public policy.
• Reduction of environmentally harmful economic activity (and encouragement of benign activity) can be accomplished by changing incentives for individuals and businesses. Taxes, subsidies, ecolabels, deposit/refund systems, liability, caps, bans, and technology standards can be used for this purpose.
• Markets for emission credits can be used to reduce the cost of compliance with environmental regulations. While industry can influence regulatory policy, there are cases where firms benefit from stricter regulations.

Efficiency, Optimality, and Sustainability

• Efficiency is about missed opportunities. If resource use is wasteful, then opportunities are squandered. Eliminating waste will produce net benefits.
• Economists focus on allocative inefficiencies. Resources may be used efficiently in a technical sense but result in wasted benefits.
• Optimality requires defining a social group and a societal objective (e.g., "well-being"). Optimal allocations will maximize the objective given relevant constraints.
• A resource allocation might be efficient but not socially optimal because there can be multiple efficient allocations, only one of which will best serve the stated welfare criteria.
• Sustainability considers the needs of future generations in resource use decisions. Optimality needs to be constrained by sustainability requirements.

Sustainable Development Goals (SDGs)

• The SDGs are 17 interconnected global goals established in 2015 by the UN General Assembly, intended to be achieved by 2030.

Sustainable Development Triad

• A sustainable system requires a balance between sufficient economic activity, an equitable social environment, and a viable natural environment.

Classical Economics

• Classical economics emerged during the Industrial Revolution. It focused on what determined living standards and economic growth
• Adam Smith, Thomas Malthus, David Ricardo, and John Stuart Mill were key figures.
• Smith systematized the argument for market allocation of resources.
• Malthus focused on the problems of population growth and diminishing returns of land and agricultural productivity.
• Ricardo addressed land quality, varying returns to land, and steady-state economic limitations.
• Mill recognized the role of knowledge and technical progress, extended the concept of welfare considerations beyond mere production, and discussed the amenity values of resources.

Neo-Classical Economics

• Neoclassical economics focused on exchange value and relative scarcity, not absolute scarcity.
• Market-driven price determination, driven by supply and demand, replaced earlier notions of absolute value.
• Methodological tools like marginal analysis, formalizing concepts like diminishing returns from earlier frameworks.
• The evolution of neoclassical economics emphasizing allocative efficiency over aggregate economic activity was related to periods of receding or stable growth.
• Walras provided a theoretical foundation for equilibrium and efficiency.
• Marshall contributed detailed analysis of supply and demand-related considerations in economic activity.

Keynesian Economics

• Keynesian economics emerged from the interwar depression. It focused on aggregate supply, demand, and the factors affecting macroeconomic activity levels, including unemployment and recession.
• Keynesian economists examined why market economies sometimes fail to utilize available resources optimally and emphasized the need for policies to address macroeconomic problems.

Welfare Economics

• Welfare economics attempts to provide a framework for evaluating alternative allocations.
• Utility is used to determine the value or cost of various allocations.
• Utilitarianism is a dominant approach to measuring overall welfare. It uses a weighted average of the total utility measures of all individuals in society.
• The Pareto concept examines a form of economic efficiency, and is useful in resource allocation in the absence of social welfare functions.

Environmental Economics

• Environmental economics analyses the economic underpinnings of pollution problems and the policies for solving pollution.
• The study utilizes incentive regulatory practices (like taxes, liability, and emissions trading), in combination with methods for evaluating costs and benefits of environmental improvements.

Ecological Economics

• Ecological economics connects economic activity to its material foundation (the natural environment) more directly than earlier frameworks like neoclassical economics.
• The emergence of ecological economics is related to the sustainability concern. Ecological systems and economics are central.
• Kenneth Boulding was a major figure in the development of ecological economics.

Natural Resource Economics

• Natural resource economics focuses on governing common-pool resources, optimal extraction rates for renewable and non-renewable resources, and the functions of resource and energy markets.
• Fossil and renewable energy are central concerns.

Recent Areas of Study

• Ecological economics focuses on the economics of natural capital.
• Economics of a Sustainable Society deals with the contributions of economic activity in achieving sustainability.

Main Differences (Environmental vs. Ecological Economics)

• Environmental economics typically uses willingness-to-pay as a value measure, often emphasizing money. Ecological economics often utilizes other methods, acknowledging limitations of monetary measurement.
• Environmental economics often focuses on market-based solutions, whilst ecological economics may emphasize that market solutions are not adequate at larger scales.
• Environmental economics increasingly incorporates future generations, but frequently using market approaches. Ecological economics often explicitly considers future generations from a broader, more systems perspective.
• Environmental economics often tries for value neutrality (objective approaches), whilst ecological economics frequently allows for values to be incorporated according to different views.

Explore the interdisciplinary interactions between economic and environmental systems in the context of natural resource management. This quiz examines the economic value of essential ecosystem services and differentiates between renewable and nonrenewable resources. Test your understanding of sustainable practices and public policy implications regarding resource usage.