COLLEGE OF AGRICULTURE AND ENVIRONMENTAL
SCIENCES
NATURAL RESOURCE MANAGEMENT
Natural Resources and Environmental Economics (NaRM 3131)
HARAMAYA UNIVERSITY, 2021
1. INTRODUCTION TO THE COURSE
1.1. Definition and Basic Terms
1.2. Emergence of Environmental Economics
1.3. Economic approach's to environmental issues
Definition and Basic Terms
Efficiency: think of it in terms of missed opportunities.
Wasteful resource use wasted opportunities
(elimination can bring benefit for some group of people).
Technical efficiency (Physical efficiency): producing maximum
possible outcome from a given set of input
• Producing goods in the cheapest way possible.
Allocative efficiency: efficiency from the view point of society
• Makes the whole society better-off.
• Technical efficiency may allow an economic agent to use a
resource that creates some losses to society because it is the
cheapest source of production.
Example:
• Electricity can be generated in a technically efficient way
through the burning of coal or gas. Coal is cheaper than gas
and hence will be chosen by profit-maximizing firms.
However, the pollution associated with use of coal is far much
higher (allocatively inefficient).
• Hence, a resource allocation choice may result in
allocative inefficiency despite being technically efficient!
Optimality: implies allocative efficiency but goes beyond it.
It considers what the objective should be for society and
uses this to determine which allocation is desirable from
societal viewpoint. This is done through the use of a social
welfare function.
A resource-use choice is socially optimal if it maximizes
that objective (as reflected in the social welfare function)
given any relevant constraints that may be operating
• Optimality is vital in the management of environmental
resources. But it is also not sufficient!.
WHAT REMAINS?
• Sustainability requirement is often disregarded in society’s
objectives.
• The pursuit of optimality will need to be constrained by a
sustainability requirement.
Sustainability: Literally, it is taking care of the posterity.
Emergence of Resource and Environmental Economics
(Reading assignment)
Contributions of the classical (Smith, Recardo…)and
the neoclassical (Leon Walras, Alfred Marshall)
economists contributed for the development of natural
resource economics.
Economic Approaches to Resource and Environmental
Issues
Property rights, efficiency and government intervention
• Property rights are important to a well-functioning market.
• property rights do not exist or are not clearly defined for many
environmental resources.
• market fails to allocate natural resources efficiently.
• Market works when there is a clear demarcation on property rights
Illustrative example: Environmental conflict and property rights
Imagine two firms that use a lake; one is a fishing concern while
the other is industrial plant that uses the lake to dump residuals from
production . The pollution source is industrial plant, and the victim of the
pollution is the fishery. Graphically,
• It is not clear that who has the right to do what with the lake-source of
conflict.
• The fishery may think that he has a right to clean lake, while the plant
may think it has the right to use the lake as a residual dump.
• The property right approach to environmental policy would:
1) specify clearly who has the rights to the lake
2) allow these rights to be traded, and
3) use gov’t authority to enforce these rights, including any trade that take place.
Scenario 1:
• Assume that the plant has the initial right to pollute as much as it
wants. The status quo is then…………..?
Es
• Is a trade possible to reduce emissions, say to ? Note that the fishery
has to pay the plant to reduce its emissions.
• How much will the fisher be willing to pay? Up to the amount of
damage avoided, area .
• How much compensation would the plant require to reduce its
emissions? It must at least be compensated for its abatement costs,
area .
• Since the maximum that the fisher is WTP is greater than the
minimum that the plant is WTA, a trade between them will take place.
• Will they trade to reduce emissions further? Yes! As long as MD is
greater than MAC, the fisher is WTP more for further reductions than
the plant requires in compensation. Thus, trade b/n them will end up
at the efficient level E*
• Scenario 2: suppose that the fisher has the right to a perfectly clean
lake. The status quo is then .
• Is a trade b/n to increase emissions ,say to “”? Note that the plant has
to pay the fisher for the right to increase emissions.
The role and limits of valuation in achieving efficiency
• Environmental resources have no market prices
• But, the absence of prices doesn’t mean that it has no values.
• Those values can be estimated through valuation techniques.
Definitions and typology of natural resource
• Natural resource can be classified in various ways.
• A useful first cut is to distinguish between ‘stock’ and ‘flow’
resources.
Stock resources: Today’s use has implication (impact) for the
tomorrow’s availability (e.g. Plants, animals and mineral deposits).
Flow resources: Those for which today’s use does not affect
tomorrow’s availability (e.g. solar radiation, the power of the wind,
tides and flowing water).
Stock resources are of two types
1. Renewable: Biotic resources having capacity to grow in size
over time through biological reproduction (plant and animal
population).
2. Non-renewable resources: also called exhaustible or
depletable resources.
Are abiotic resources that have no capacity to grow in size
over time (stocks of minerals)
Substitutability and irreversibility
• An important issues for policy decisions on environment.
• If the depletion of a resource stock is irreversible, and there is
no close substitute for the services that it provides, then the
rate at which the resource is depleted has major implications
for sustainability.
• implications of over exploiting a nonrenewable resource that
may not have close substitute
