Introduction to Natural
Resource Economics
By
George Taako Edema
Lecture Objectives
1. To define economics, natural resource economics and explain why
a special branch of economics
2. To explain the emergence of natural resource economics
3. To describe the taxonomy of natural resources
4. To explain the key Concepts in natural resource economics (
Scarcity, efficiency, equity, optimality and sustainability)
Overview
Economics
• Is a science of scarcity
• Focuses on examining trade-offs and the efficient allocation of scarce
resources among competing uses
Broad branches of economics;
• Microeconomics
• Macroeconomics
Cont…
1.Macroeconomics
• The study of the economic performance as a whole (total outputs,
employment, inflation)
2.Microeconomics
• The study of the behavior of individual or small group.
Cont…
Natural Resource Economics
• Is a special branch of economics which is the study of the use of
natural resources (such as energy, minerals, timber, fish, water) as
inputs in the production of goods and services
• Related to natural resource economics is Environmental economics
Cont…
Environmental Economics
• Is a special branch of economics that focuses on how and why people
make decision that have environmental consequences and the role of
economic institution (public or private, laws, etc.) and policies in
influencing these decisions.
An illustration
Natural and Environmental
Resources
NR Env. Economics
Economics Economy
Cont…
Natural Resource and Environmental Economics are two special
branches of economics that;
• Applies economic tools to study resources provided by nature.
• Studies economic activities that influence natural systems.
Concerns of NRE?
1. Focus on examining trade-offs and the efficient allocation of
resources.
2. Irreversible events ( e.g. extinction).
3. Trade off between present and the future
4. Market failures.
5. Ecological response to changes in economic system.
6. Incentives that alter human behavior and achieve desired goal e.g.
resource conservation.
Assignment
Explain the emergence of Natural Resource Economics highlighting
the driving forces behind its emergence.
Instruction:
• Well typed, spacing 1.5, font must be Time New Romans and font
size must be 12
• E-mail to
[email protected] not later than 8:00 am on
Monday 17 September 2018.
The Taxonomy of Natural Resources
In general, there are three categories of resources that we will discuss
in this class. They are:
• Natural resource stocks
• Resource flows
• Environmental resources
Cont…
Natural resources
• Provided by nature
• Separable
• Allocable at the margin (e.g. one tree, one fish)
• May or may not require addition of other productive forces for use
• Natural resources are typically "stocks" that provide a flow of
consumable goods (e.g. a school of fish, a herd of deer).
Cont…
• Resources are typically living (e.g. trees, fish), but sometimes not
(e.g. soils, groundwater)
• Stocks are degradable, but are sometimes resilient to human activity
Cont…
Stocks may be either:
• exhaustible (depletable and non-renewable)
• renewable
• recyclables (special case in which resource or product maintains its
basic structure during use allowing recovery and reprocessing for
future use).
Cont…
Resource flows
• Are natural resources that do not exist as stocks e.g. wind, solar
energy
The key distinction from resource stocks is that consumption of
resource flow has no impact on the size of the resource or on the
availability of the resource flow in the future.
Cont…
Environmental resources
• Provided by nature
• Indivisible, i.e. can't be easily divided
• Typically the quality of the resource matters more than the quantity
• Not consumable directly
Cont…
Examples:
• Ecosystem services
• Aesthetic benefits
• Forests
• Mountains
Quality is often affected by human activity via pollution, degradation,
alteration
Some motivating questions for the course
What are the benefits and costs of using a natural resource in a particular
way?
What are the best policies to protect the environment?
How can society balance economic and environmental goals? Or
How can society balance material needs and ecosystem services and
How can society use resources while taking care of posterity.
Basic concepts
Scarcity
• Scarcity is a term used to describe the relative abundance of a
resource
• Scarcity is often indicated by price
• The more scarce a resource, the higher its price
• BUT government policies or behaviors by citizens and businesses
may also influence prices.
• Also, for some goods, especially environmental goods, markets don't
exist, so the concept of a price may be meaningless
Cont…
Efficiency
• Efficiency is a description of the way a scarce resource is used based
on a range of competing uses
• The most efficient use of a resource is that use which provides the
greatest value to society
• BUT efficiency says nothing about who owns or controls a resource
Cont…
• The allocation of goods and services by the market to rational agents
is efficient only if there are no externalities
Pareto efficiency
• A given economic arrangement is Pareto efficient if there can be no
arrangement which will leave some one better off without worsening
the position of others.
Cont…
Equity
• Equity is a description of who owns or controls a resource.
• It is a subjective indicator of fairness (e.g. distribution of income) and
necessarily requires value judgments.
• Equity is multi-dimensional and is often at the center of the debate
regarding environmental resources (e.g. spotted owl, global warming).
• Often an environmental issue involves aspects of all three concepts
above (e.g. hypoxia)
Cont…
Optimality
• Efficiency is a necessary but not a sufficient condition for optimality;
optimality includes equity
• In other wards, a given situation is optimal if it meets efficiency and
equity criteria.
Sustainability: Taking care of posterity
