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The Economic Approach to
Environmental and Natural
Resources, 3e
By James R. Kahn
© 2005 South-Western, part of the Thomson Corporation
Part I
Theory and Tools of
Environmental and Resource
Economics
3e
Chapter 1
Introduction
In the space of a single human lifetime, society finds
itself suddenly confronted with a daunting complex of
trade-offs between some of its most important
activities and ideals. (p.1)
 Economics – the study of how to make tradeoffs; the science of the allocation of scarce
resources.
 There is difficulty in confronting trade-offs
between environmental preservation and
other economic and social activities.
 The longer we defer decisions, the more
stark the trade-offs.
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Trade-offs occur at every geographic
scale
 We are experiencing losses of habitat and
the collapse of many renewable resources
including:
 The majority of our most important global fisheries.
 Massive losses of tropical forests.
 Rapid die-off of coral reefs.
 Extensive losses of wetlands.
 Conversion of grasslands and other ecosystems to
desert at an alarming rate.
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Goals of this textbook
 Develop a framework for examining
environmental problems and recognizing
what constitutes a set of feasible solutions.
 Attempt to show how economics can be part
of this framework.
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A Taxonomy of Resources
 Three categories of resources defined in this
book include:
Natural Resources
Physical Resource Flows
Environmental Resources
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A Taxonomy of Resources
Natural Resources
 These are provided by nature and can be
divided into increasingly smaller units and
allocated at the margin.
Examples include: barrels of oil, cubic meters of
wood, kilograms of fish.
 Stocks of natural resources may be fixed or
have regenerative capability.
 These resources are divided into renewable
resources and exhaustible resources.
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A Taxonomy of Resources
Physical Resource Flows
 These resources do not exist as a stock, but
have never-ending flows.
Examples include: solar energy, wind power, tidal
power and geothermal power.
 Our consumption of these resources has no
effect on the stock or our ability to consume
them.
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A Taxonomy of Resources
Environmental Resources
 Resources provided by nature that are
indivisible.
Examples include: an ecosystem, an estuary, and
the ozone layer.
 These resources can be examined at the
margin in terms of quality but not quantity.
 These resources are not consumed directly,
but people consume the ecological services
provided by these resources.
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A Taxonomy of Resources
Ecological Services
 Flow from environmental resources.
 Ecological service is a function of quality of the
environmental resource.
 These services are provided to both ecosystems and
social systems.
 Clean air and water support basic biological functions.
 Clean air and water provide important recreational and
aesthetic benefits.
 Clean water contributes to economic production
processes.
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A Taxonomy of Resources
Ecological Services promote the stability and
resilience of the ecosystem that generates
them.
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.
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Why Study Environmental and Resource
Economics?
 Study of natural sciences is not sufficient to
completely analyze problem because these sciences
do not include human behavior.
 Study of economics does not recognize that optimal
allocation of environmental resources has
implications for future choice.
 Many decisions regarding environmental resources
are irreversible.
 Market failure is an important characteristic of many
environmental issues.
 Optimal allocation requires understanding the whole
ecological system and how it responds to changes
in both ecological and economic systems.
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Figure 1.1
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Figure 1.2
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Figure 1.3
Physical and Natural
Environment
Social System
Economic
System
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Why Study Environmental and Resource
Economics?
 The social and economic systems are not
separate from the physical and natural
environment, but contained within it.
 A good understanding of environmental and
resource economics requires the
development of an understanding of how
physical and natural sciences contribute.
 Economics becomes even more significant
when integrated into this interdisciplinary
overview.
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