Natural Resources all the ‘original’ elements that comprise the Earth’s natural endowments or life- support systems: air, water, the Earth’s crust, and.

Natural ResourcesNatural Resources

all the ‘original’ elements that comprise all the ‘original’ elements that comprise the Earth’s natural endowments or life-the Earth’s natural endowments or life-support systems: air, water, the Earth’s support systems: air, water, the Earth’s

crust, and radiation from the Sun.crust, and radiation from the Sun.

Arable land, wilderness areas, mineral fuels and Arable land, wilderness areas, mineral fuels and nonfuel minerals, watersheds, and the ability of the nonfuel minerals, watersheds, and the ability of the natural environment to degrade waste and absorb natural environment to degrade waste and absorb

ultraviolet light from the Sun.ultraviolet light from the Sun.

Renewable Renewable resourcesresources

Natural ResourcesNatural Resources

Non- renewable resources

Renewable ResourcesRenewable Resourcescapable of regenerating themselves capable of regenerating themselves

within a relatively short period.within a relatively short period.

plants, fish, forests, soil, solar radiation, wind, tides, etc.plants, fish, forests, soil, solar radiation, wind, tides, etc.

Biological resources

various species of plants and animals

can be irreparably damaged if they are exploited beyond a certain critical threshold

Flow resources

solar radiation, wind, tides, and water streams

Renewable ResourcesRenewable Resources

Nonrenewable ResourcesNonrenewable Resourceseither exist in fixed supply or are renewable only on a either exist in fixed supply or are renewable only on a geological timescale, whose regenerative capacity can geological timescale, whose regenerative capacity can

be assumed to be zero for all practical human purposes.be assumed to be zero for all practical human purposes.

Recyclable Recyclable resourcesresources

metallic minerals metallic minerals (iron, aluminum, (iron, aluminum, copper, and uranium)copper, and uranium)

Nonrecyclable Nonrecyclable resourcesresources

fossil fuelsfossil fuels

Nonrenewable ResourcesNonrenewable Resources

Environmental EconomicsEnvironmental Economics

originated in the 1960s

one of the fastest-growing fields of study in economics.

increasing recognition of the significant roles that nature plays in the economic process as well as in the formation of economic value.

primary focus is how to use or primary focus is how to use or manage the natural environment manage the natural environment

(air, water, landmass) as a (air, water, landmass) as a valuable resource for the disposal valuable resource for the disposal

of waste.of waste.

Environmental EconomicsEnvironmental Economics

Economy and EnvironmentEconomy and Environment

economy is assumed to economy is assumed to depend depend on the natural on the natural environmentenvironment

the extraction of nonrenewable resources and the extraction of nonrenewable resources and the harvest of renewable resourcesthe harvest of renewable resources

the disposal and assimilation of wastesthe disposal and assimilation of wastes

the consumption of environmental amenitiesthe consumption of environmental amenities

Economy and EnvironmentEconomy and Environment

Neoclassical ApproachNeoclassical Approach

Natural resources are ‘essential’ factors of production

Natural resources are scarce.

The economic value of natural resources is determined by consumers’ preferences, and these preferences are best expressed by a freely operating private market system.

Market price can be used as an indicator of resource scarcity.

Natural resources can always be replaced (partially or fully) by the use of other resources that are manufactured or natural.

Technological advances continually augment the scarcity of natural resources.

natural ecosystem is treated as being outside the human economy and exogenously determined

Neoclassical ApproachNeoclassical Approach

Key issues:Key issues:

the market as a provider of information the market as a provider of information about resource scarcityabout resource scarcity

resource (factor) substitutionresource (factor) substitution

scarcity augmenting technological scarcity augmenting technological advanceadvance

the nature of the relationships between the the nature of the relationships between the human economy and the natural human economy and the natural environmentenvironment

Neoclassical ApproachNeoclassical Approach

Neoclassical EconomicsNeoclassical Economics

““Invisible Hand” theorem: idealized Invisible Hand” theorem: idealized capitalist market economycapitalist market economy

Freedom of choice based on self-interestFreedom of choice based on self-interest

Perfect informationPerfect information

CompetitionCompetition

Mobility of resourcesMobility of resources

Ownership rightsOwnership rights

Price signalsPrice signals

Free good – no priceFree good – no price Scarce good – positive priceScarce good – positive price

Price as a signal of Price as a signal of

emerging resource scarcityemerging resource scarcity

decreasing resource scarcity over time

Factor substitution one kind of resource can be freely replaced by

another in the production process.

Input substitutability Constant factor substitution possibilities

Diminishing factor substitution possibilities: the opportunity cost of using natural capital increases at an increasing rate as natural capital becomes scarce

No factor substitution possibilities: to produce a given level of output a certain minimum of natural capital input is needed

Technological AdvanceTechnological Advance

the ability to produce a given amount of the ability to produce a given amount of output by using less of output by using less of all all inputsinputs

conservation of resourcesconservation of resources

the amount of resource conservation depend the amount of resource conservation depend on the impact that technological advance has on the impact that technological advance has on the on the relative productivity relative productivity of each of the of each of the inputsinputs

The human economy

and the natural world

the human economy is composed of three entities: people, social institutions and commodities

the value of resources is assumed to emanate exclusively from their usefulness to human

matter and energy from the natural environment are continuously transformed to create an immaterial flow of value and utility

Ecological PerspectiveEcological Perspective

Environmental resources of the biosphere Environmental resources of the biosphere are are finitefinite

Mutual interdependencies: Mutual interdependencies: everything is everything is related to everything elserelated to everything else

Biosphere is characterized by Biosphere is characterized by a a continuous transformation of matter and continuous transformation of matter and energyenergy

Material recycling Material recycling is essential for the is essential for the growth and revitalization of all the growth and revitalization of all the subsystems of the biospheresubsystems of the biosphere

Nothing remains Nothing remains constant constant in naturein nature

The human economy is a The human economy is a subsystem subsystem of of the biospherethe biosphere

Ecological PerspectiveEcological Perspective

the human economy is completely and the human economy is completely and unambiguously dependent on natural unambiguously dependent on natural ecological systems for its material needsecological systems for its material needs

the growth of the economic subsystem is the growth of the economic subsystem is ‘bounded’ by a nongrowing and finite ‘bounded’ by a nongrowing and finite ecological sphereecological sphere

nature acts as both a nature acts as both a sourcesource of and a of and a limiting factorlimiting factor on the basic material on the basic material requirements for the human economyrequirements for the human economy

EcologyEcology

systematically systematically studies the studies the

relationships relationships between living between living organisms and organisms and

the physical and the physical and chemical chemical

environment in environment in which they live.which they live.

EcosystemEcosystem

living organisms in a specified physical living organisms in a specified physical environment,environment,

the interactions among the organisms,the interactions among the organisms,

the nonbiological factors in the physical the nonbiological factors in the physical environment that limit their growth and environment that limit their growth and reproduction.reproduction.

Atmosphere Hydrosphere

Litosphere Biosphere

Components of the

Ecosystem

Dynamic interaction between abiotic Dynamic interaction between abiotic and biotic componentsand biotic components

Abiotic componentsAbiotic components

habitat for organisms.habitat for organisms.

reservoir of the six most important reservoir of the six most important elements for life (C, H, O, N, S, P).elements for life (C, H, O, N, S, P).

Biotic components

Producers: organisms capable of photosynthesis.

Consumers: organisms whose survival depends on the organic materials manufactured by the producers.

Decomposers: micro-organisms and many other small animals that rely on dead organisms for their survival

A functioning natural ecosystem is characterized by a constant transformation of matter and energy.

Material recycling is essential for the growth and revitalization of all the components of the ecosphere

Energy and thermodynamicsEnergy and thermodynamics

The first law of thermodynamics: principle The first law of thermodynamics: principle of conservation of energy - matter and of conservation of energy - matter and energy can neither be created nor energy can neither be created nor destroyed, only transformed.destroyed, only transformed.

The second law of thermodynamics: The second law of thermodynamics: energy transformations – in every energy energy transformations – in every energy conversion some useful energy is conversion some useful energy is converted to useless (heat) energy converted to useless (heat) energy ((entropy)entropy)

In all conversion of energy to work, there In all conversion of energy to work, there will always be a certain waste or loss of will always be a certain waste or loss of energy quality.energy quality.

Useful energy cannot be recycledUseful energy cannot be recycled

Natural ecosystems require continual Natural ecosystems require continual energy flows from an external sourceenergy flows from an external source

Ecology and the human Ecology and the human economyeconomy

The human economy is a The human economy is a subsystemsubsystem of of the biospherethe biosphere

Natural resources cannot be viewed Natural resources cannot be viewed merely as factors of productionmerely as factors of production

Humans lead to;Humans lead to; Simplification of ecosystemsSimplification of ecosystems Creation of industrial pollution (waste)Creation of industrial pollution (waste)

waste-absorptive capacity waste-absorptive capacity of the natural of the natural environment: environment: ecological thresholdecological threshold

trade-off between economic goods and trade-off between economic goods and environmental qualityenvironmental quality

Assimilative capacity of the natural Assimilative capacity of the natural environmentenvironment

the assimilative capacity of the the assimilative capacity of the environment is environment is limited.limited.the assimilative capacity of the natural the assimilative capacity of the natural environment depends on the environment depends on the flexibility flexibility of of the ecosystem and the the ecosystem and the nature nature of the of the waste.waste.pollution reduces the capacity of an pollution reduces the capacity of an environmental medium to withstand further environmental medium to withstand further pollutionpollution

Assume a linear relationship between waste and economic activity

W = f (X, t)W = f (X, t)

W : level of waste generatedX : production of goods and servicest : technological and ecological factors

if t assumed constant;

W = W = ββXX

Market Economy andMarket Economy andAllocation of Environmental Allocation of Environmental

ResourcesResources

Ownership of a resource:Ownership of a resource:

ownership rights are ownership rights are completely specifiedcompletely specified

the rights are completely the rights are completely exclusiveexclusive

the ownership rights are the ownership rights are transferabletransferable

ownership is ownership is enforceableenforceable

When these four conditions are met, self-When these four conditions are met, self-interest based behavior of individuals will interest based behavior of individuals will ensure that resources are used where ensure that resources are used where they are most valued.they are most valued.

Environmental resources tend to be Environmental resources tend to be common property resources.common property resources.

The ownership of environmental The ownership of environmental resources cannot be clearly defined.resources cannot be clearly defined.

for the common property resources, for the common property resources, economic pursuit on the basis of individual economic pursuit on the basis of individual self-interest would not lead to what is best self-interest would not lead to what is best for society as a wholefor society as a whole

the use of commons needs to be regulated the use of commons needs to be regulated by a ‘by a ‘visible handvisible hand’’

ExternalitiesExternalitiesPositive and NegativePositive and Negative

Non-rivalryNon-rivalry

Lack of excludabilityLack of excludability

In the presence of real externalities, there In the presence of real externalities, there will be a divergence between private and will be a divergence between private and social evaluations of costs and benefitssocial evaluations of costs and benefits

Positive Externality:Positive Externality:

Social benefits = Private benefits + External benefits

External benefits > 0

Social benefits > Private benefits

Negative Externality:Negative Externality:

Social costs = Private costs + External costs

External costs > 0

Social costs > Private costs