ELEC116 Natural Resources Economics PDF

ELEC116 JULIE ANNE V. SARINAS CEMDS, Cavite State University  Economic and environmental systems interact in many important ways, and an increasing number of economists, scientists, and resource managers are finding that they need to work in an interdisciplinary fashion in...

ELEC116 JULIE ANNE V. SARINAS CEMDS, Cavite State University  Economic and environmental systems interact in many important ways, and an increasing number of economists, scientists, and resource managers are finding that they need to work in an interdisciplinary fashion in order to understand these interactions and develop effective public policy. ELEC11  Economic systems derive many valuable inputs (some commodified, some free) from the ecological, hydrological, geological, atmospheric, and other systems and processes of Earth. Essential ecosystem services such as nutrient cycling, sink functions of wetlands, and the hydrological cycle have economic value, and methods are being developed to measure these values. ELEC11 renewable resources - resources that are regenerated over time through ecological processes, such as forests and fisheries, but can be depleted through exploitation. nonrenewable resources – resources that do not regenerate through ecological processes, at least on a human time scale, such as oil, coal, and mineral ores. ELEC11 1. Natural resources and solar energy provide the essential input into economic processes implies that human well-being is ultimately dependent on these resources. Measuring well-being using standard economic metrics, such as gross domestic product, understates the importance of natural resources. This suggests a need for alternative indicators of well-being. 2. Ecological system has its own circular flow, which is determined by physical and biological rather than economic laws. This broader flow has only one net “input”—solar energy—and only one net “output”—waste heat. Everything else must somehow be recycled or contained within the planetary ecosystem. 3. In the standard circular flow model, the economic system is unbounded and can theoretically grow indefinitely. But in the expanded model, economic activity is limited by both the availability of natural resources and the ability of the environment to assimilate wastes and pollution. Thus the overall scale of the economy relative to the available natural resources must be considered. ELEC11  Economic activity can have negative impacts on the functional integrity of these natural systems and processes, though in some cases these impacts can be substantially reduced or even eliminated through careful public policy. The Hungry Syrian Wanderer Apr 2, 2019 ELEC11  Environmentally harmful activity can be reduced (or environmentally benign activity can be increased) by changing the incentives of people and businesses through the use of taxes, subsidies, ecolabels, deposit/refund systems, and liability, or through the use of caps, bans, and technology standards. ELEC11  Markets for emission credits Auctions and sales by mutual agreement Offset credits can be used in conjunction with emissions caps to reduce Transaction among the cost of compliance with emitters and participants environmental regulation. While industry groups will oftentimes exert political influence to reduce or overturn costly environmental regulations, under some circumstances firms have an incentive to lobby to impose more stringent environmental regulation on their industry. ELEC11  ELEC11 6 Efficiency, Optimality, and Sustainability  ELEC1 16 Efficiency One way of thinking about efficiency is in terms of missed opportunities. If resource use is wasteful in some way then opportunities are being squandered; eliminating that waste (or inefficiency) can bring net benefits to some group of people.  Economists focus on allocative inefficiencies. Even where resources are used in technically efficient ways, net benefits are sometimes squandered. ELEC11  Suppose that electricity can be, in technically efficient ways, generated by the burning of either some heavily polluting fossil fuel, such as coal, or a less polluting alternative fossil fuel, such as gas. Because of a lower price for the former fuel, it is chosen by profit- maximizing electricity producers. The pollution results in damages which necessitate expenditure on health care and clean-up operations. These expenditures, not borne by the electricity supplier, may exceed the cost saving that electricity producers obtain from using coal. ELEC11  ELEC1 16 Optimality To understand the idea of optimality we need to have in mind: 1. a group of people taken to be the relevant ‘society’; 2. some overall objective that this society has, and in terms of which we can measure the extent to which some Resource-use choice is socially optimal resource-use decision is if it maximizes the objective given any relevant constraints. desirable from that society’s point of view.  Even if a resource allocation is efficient, it may not be socially optimal. This arises because there will almost always be a multiplicity of different efficient resource allocations, but only one of those will be ‘best’ from a social point of view. ELEC11  ELEC1 16 Sustainability Sustainability involves taking care of posterity or future generations. If taking care of posterity is seen as a moral obligation, then the pursuit of optimality as economists usually specify it will need to be constrained by a sustainability requirement. The Sustainable Development Goals or Global Goals are a collection of 17 interlinked global goals designed to be a "blueprint to achieve a better and more sustainable future for all". The SDGs were set up in 2015 by the United Nations General Assembly and are intended to be achieved by the year 2030. ELEC11  Sufficient Economy Sustainable Economic Equitable Social Development Environment Sustainable Development A Viable Natural Nurturing Environment Community Sustainable Natural and Built Environment ELEC11  ELEC11 6 Emergence of Resource and Environmental Economics  ELEC1 16 Classical Economics Adam Smith Thomas Malthus David Ricardo John Stuart Mill (1723–1790) (1766–1834) (1772–1823) (1806–1873) A period during which the industrial revolution was taking place (at least in much of Europe and North America) and agricultural productivity was growing rapidly. ELEC11  A recurring theme of political–economic debate concerned the appropriate institutional arrangements for the development of trade and growth. ELEC11 A central interest of the classical economists was the question of what determined standards of living and economic growth. ELEC11  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. Adam Smith Natural resources were seen as important (1723–1790) determinants of national wealth and its growth. Land (sometimes used to refer to natural resources in general) was viewed as limited in its availability. ELEC11  There was assumptions that land was a necessary input to production and that it exhibited diminishing returns, the early classical economists came to the conclusion that economic progress would be a transient feature of history. Adam Smith (1723–1790) They saw the inevitability of an eventual stationary state, in which the prospects for the living standard of the majority of people were bleak. ELEC11  Malthus, who argued it most forcefully in his Essay on the Principle of Population (1798), give rise to the practice of describing those who now question the feasibility of continuing long- run economic growth as ‘neo-Malthusian’. Thomas Malthus A fixed land quantity, an assumed tendency for (1766–1834) continual positive population growth, and diminishing returns in agriculture implied a tendency for output per capita to fall over time. ELEC11  There was, according to Malthus, a long-run tendency for the living standards of the mass of people to be driven down to a subsistence level. At the subsistence wage level, living standards Thomas Robert would be such that the population could just Malthus reproduce itself, and the economy would (1766–1834) attain a steady state with a constant population size and constant, subsistence- level, living standards. ELEC11  The notion of a steady state was formalized and extended by Ricardo, particularly in his Principles of Political Economy and Taxation (1817). Malthus’s assumption of a fixed stock of land was replaced by a conception in David Ricardo which land was available in parcels of (1772–1823) varying quality. ELEC11  Agricultural output could be expanded by increasing the intensive margin (exploiting a given parcel of land more intensively) or by increasing the extensive margin (bringing previously uncultivated land into productive use). However, in either case, returns to the land input were taken to be David Ricardo diminishing. (1772–1823) Economic development then proceeds in such a way that the ‘economic surplus’ is appropriated increasingly in the form of rent, the return to land, and development again converges toward a Malthusian stationary state. ELEC11  Mill’s work utilizes the idea of diminishing returns, but recognizes the countervailing influence of the growth of knowledge and technical progress in agriculture and in production more generally. Foreshadowing later developments in environmental economics, and the thinking of John Stuart Mill conservationists, Mill adopted a broader view of (1806–1873) the roles played by natural resources than his predecessors. In addition to agricultural and extractive uses of land, Mill saw it as a source of amenity values (such as the intrinsic beauty of countryside) that would become of increasing relative importance as material conditions improved. ELEC11  ELEC1 16 Neo-Classical Economics William Stanley Carl Menger Leon Walras Alfred Marshall John Maynard Jevons (1840–1921) (1834–1910) (1842–1924) Keynes (1835–1882) (1883–1946)  Neoclassical economists explained value as being determined in exchange, so reflecting preferences and costs of production. The concepts of price and value ceased to be distinct. Previous notions of absolute scarcity and value were replaced by a concept of relative scarcity, with relative values (prices) determined by the forces of supply and demand. ELEC11  At the methodological level, the technique of marginal analysis was adopted, allowing earlier notions of diminishing returns to be given a formal basis in terms of diminishing marginal productivity in the context of an explicit production function. ELEC11  Jevons and Menger formalized the theory of consumer preferences in terms of utility and demand theory. William Stanley Carl Menger Jevons (1840–1921) (1835–1882) The evolution of neoclassical economic analysis led to an emphasis on the structure of economic activity, and its allocative efficiency, rather than on the aggregate level of economic activity. Concern with the prospects for continuing economic growth receded, perhaps reflecting the apparent inevitability of growth in Western Europe at this time. ELEC11  Leon Walras developed neoclassical General Equilibrium Theory, and in so doing provided a rigorous foundation for the concepts of efficiency and optimality that we employ extensively in this text. Leon Walras Alfred Marshall was responsible for (1834–1910) elaboration of the partial equilibrium supply-and demand-based analysis of price determination so familiar to students of modern microeconomics. A substantial part of modern environmental economics continues Alfred Marshall to use these techniques as tools of (1842–1924) exposition. ELEC11  Economic depression in the industrialized economies in the inter-war years provided the backcloth against which John Maynard Keynes developed his theory of income and output determination. The Keynesian agenda switched attention to John Maynard aggregate supply and demand, and the reasons Keynes why market economies may fail to achieve (1883–1946) aggregate levels of activity that involve the use of all of the available inputs to production. Keynes was concerned to explain, and provide remedies for, the problem of persistent high levels of unemployment, or recession. ELEC11 This direction of development in mainstream economics had little direct impact on the emergence of resource and environmental economics. What is noticeable in early neoclassical growth models is the absence of land, or any natural resources, from the production function used in such models. Classical limits-to-growth arguments, based on a fixed land input, did not have any place in early neoclassical growth modelling. ELEC11  ELEC1 16 Welfare Economics David Hume Jeremy Bentham Vilfredo Pareto Arthur Cecil (1711–1776) (1748-1832) (1848-1923) Pigou (1877-1959)  Welfare economics attempts to provide a framework in which normative judgements can be made about alternative configurations of economic activity. In particular, it attempts to identify circumstances under which it can be claimed that one allocation of resources is better (in some sense) than another. ELEC11  David Hume Jeremy Bentham John Stuart Mill (1711–1776) (1748-1832) (1806–1873) Rankings are only possible if one is prepared to accept some ethical criterion. The most commonly used ethical criterion adopted by classical and neoclassical economists derives from the utilitarian moral philosophy, developed by David Hume, Jeremy Bentham and John Stuart Mill. Utilitarianism has social welfare consisting of some weighted average of the total utility levels enjoyed by all individuals in the society. ELEC11  Economists have attempted to find a method of ranking different states of the world which does not require the use of a social welfare function, and makes little use of ethical principles, but is nevertheless useful in making prescriptions about resource allocation. Vilfredo Pareto The notion of economic efficiency, also known (1848-1923) as allocative efficiency or Pareto optimality developed by Vilfredo Pareto (1897) is what they have come up with. ELEC11  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. Important early work in the analysis of externalities and market failure is to be found in Marshall (1890). Alfred Marshall The first systematic analysis of (1842–1924) pollution as an externality is to be found in Pigou (1920). However, environmental economics did not really ‘take off’ until the 1970s. Arthur Cecil Pigou (1877-1959) ELEC11  ELEC1 16 Ecological Economics The dependence of economic activity on its material base – the natural environment – was a central concern of classical economics, but not of neoclassical economics. Economics and ecology were seen as the two disciplines most directly concerned with what was seen as the central problem – sustainability.  Kenneth Boulding is widely regarded as one of the ‘founding fathers’ of ecological economics. Boulding was one of a few scholars, including some economists, who continued, during the ascendancy of neoclassical economics, to insist on the central importance of studying Kenneth Boulding economics in a way which takes on board what is known about the laws of nature as they affect the material basis for economic activity. ELEC11  The introduction of natural resources into neoclassical models of economic growth occurred in the 1970s, when some neoclassical economists first systematically investigated the efficient and optimal depletion of resources. This body of work, and the developments that have followed from it, is natural resource economics. ELEC11  ELEC1 16 Environmental Economics analyzes the economic basis for pollution problems, as well as the policies designed to resolve pollution Much of the work in environmental economics studies the application and performance of incentive regulatory practices, such as pollution taxes, liability, or cap-and-trade systems. Some environmental economists also develop or apply methods for estimating the benefits of environmental improvements or the costs of pollution externalities.  ELEC1 16 Natural Resources Economics traditionally addressed problems of governing common-pool natural resources, of finding dynamically optimal rates of renewable or nonrenewable resource extraction, and of the workings of resource and energy markets Fossil or renewable energy resources and policy are an important area of study in natural resource economics.  ELEC1 16 Recent Areas of Study Ecological Economics study focused on understanding the economics of natural capital and the ecosystem goods and services that flow from it Economics of a Sustainable Society includes efforts at identifying, modeling, and measuring the contribution of economic activities to a more sustainable society