ECON 310 Chapter 1 Notes

Economics has often been described as the study of how to make trade-offs. The quote from Gretchen Daily in Chapter 1 implies that we have difficulty in confronting the tradeoff between environmental preservation and other economic and social activities. These trade-offs occur on every geographic scale. We are experiencing great loss of habitat and collapse of many renewable resource systems. The goal of this book is to help students develop a framework for both analyzing the scope of these environmental issues and identifying possible solutions to the problems. The policies that are chosen on the national and international level during this and the next decade have the potential to determine both the nature of the planet’s physical and natural environment and the standard of living of the planet’s inhabitants.

This text will examine resources from three different contexts:

1. Natural resources.

2. Physical Resource Flows.

3. Environmental Resources.

Natural resources are those resources provided by nature that can be divided into increasingly small units and allocated at the margins. Examples include barrels of oil, cubic meters of wood, kilograms of fish, and liters of drinking water. The stocks of natural resources may be fixed or may have regenerative capability. Resources such as oil, minerals are generally included among exhaustible, while living resources such plants and animals are generally included among renewable resources.

Solar energy, wind power while often called renewable resources are more appropriately called physical resource flows. These resources which unlike renewables, do not exist as a stock, but have never-ending flows.

Environmental resources are those resources provided by nature that are indivisible. Examples include an ecosystem, an estuary, and the ozone layer. These can be examined at the margin in terms of quality but not quantity. Another characteristic is that the resource itself is not consumed, but people consume services provided by the resource. The provision of ecological services is a function of the quality of the environmental resource. As stresses from human activities accumulate and negatively impact the quality of the ecosystem, the ecosystem is generally reduced to producing a less comprehensive set of ecological services.

It is important to recognize that ecological services are provided to both the ecosystem and social systems. In addition to clean air and water, ecological services also create important recreational and aesthetic benefits. Ecological services are also important to economic production processes. 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.

Environmental economics should be examined as a separate discipline from ecology or economics because of the complexity of the problem of concern. Ecology examines the environmental system but does not consider human behavior. Traditional economic problems are static in nature. The optimal consumption of TV’s will not limit tomorrow’s consumption choices. However, today’s decision about resource use can and does limit tomorrow’s resource use choices. This is further complicated by the issue of irreversibility. Some choices about resource use may mean that resource disappears without potential for recovery. For example, if it takes one thousand years to grow a redwood and all the redwoods are cut down, effectively they are gone.

Market failure is also a concern in resource allocation. In order to develop a good understanding of environmental and resource economics it is necessary to develop some understanding of how the individual parts of the environment contribute to the operation of economic systems. An environmental and resource economist, particularly one anticipating a career in the public area, must be somewhat interdisciplinary and understand enough to know how the physical and natural environment works.

KEY CONCEPTS AND DEFINITIONS

Natural Resource - Resources provided by nature that can be divided into increasingly smaller units and allocated at the margin. Includes such resources as oil, wood and fish.

Exhaustible Resource - Stock of these resources are fixed or rate of regeneration is so small relative to consumption that can be regarded as fixed. Example oil.

Renewable Resource - Stock of resource is responsible for the growth or regeneration of resource stock. Example fish.

Physical Resource Flows - Resources do not exist as a stock but have never-ending flows. Resource can not be exhausted but there is no regenerative capability. Example solar energy.

Environmental Resources - Resources provided by nature that are indivisible. Possible to examine changes in quality but not quantity. Examples include ecosystem, estuary.

Ecological Services – Services which flow from environmental resources. Examples include clean air, clean water and fertile soil.

Natural Science - Physical sciences which examine the relationship between components of environment. Includes biology, ecology and chemistry.

Economics - Social science which examines the allocation of scarce resources across competing uses to meet unlimited human wants.

Irreversible Action - Action whose impact can not be reversed. Example is an action which results in the extinction of a species. There will be no way to retrieve the species (short of Jurassic Park).

Market Failure - Results when interaction of demand and supply and the resulting equilibrium price and output do not fully reflect all the costs and benefits associated with the production and consumption of the good or service.

Chapter 1 Short-answer questions

1. Why is the first decade of the 21^st century an interesting time to be studying environmental and natural resource economics?

· Improved quality of life through environmental programs.

· Continued decline in quantity of untouched ecosystems.

· Improved understanding of the links between economics, ecology, and political economy.

2. Why is it important to recognize the interdisciplinary aspects of environmental and natural resource economics?

· No one discipline can completely encompass all aspects of environmental problems.

3. What is the difference between natural resources, physical resource flows, and environmental resources?

· Natural resources – resources provided by nature that can be divided into increasingly small units.

· Physical resource flows – resources that do not exist as a stock but provide unending flows.

· Environmental resources – resources provided by nature that are indivisible. Examples include ecosystem or an estuary.

4. What is the importance of ecological services to the economic and social systems?

· Ecological services provide clean water and air which are important not only to the ecological system but also contribute to aesthetic and recreational needs of society. Economic production requires the use of these services as well.

5. How are the economic, social system, the physical environment and the natural environment linked?

· The natural and physical environment provide resource units which flow into the economic and social system. The economic and social system “dump” back into the physical and natural environment. The shape of the social system determines and is determined by the economic system.