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Natural Resources
all the ‘original’ elements that comprise
the Earth’s natural endowments or lifesupport systems: air, water, the Earth’s
crust, and radiation from the Sun.
Arable land, wilderness areas, mineral fuels and
nonfuel minerals, watersheds, and the ability of the
natural environment to degrade waste and absorb
ultraviolet light from the Sun.
Natural Resources
Non- renewable
Renewable Resources
capable of regenerating themselves
within a relatively short period.
plants, fish, forests, soil, solar radiation, wind, tides, etc.
Renewable Resources
various species of plants
and animals
can be irreparably damaged
if they are exploited
beyond a certain critical
Flow resources
solar radiation, wind, tides,
and water streams
Nonrenewable Resources
either exist in fixed supply or are renewable only on a
geological timescale, whose regenerative capacity can
be assumed to be zero for all practical human purposes.
Nonrenewable Resources
metallic minerals
(iron, aluminum,
copper, and uranium)
fossil fuels
Environmental Economics
originated in the 1960s
one of the fastest-growing fields of study in
increasing recognition of the significant
roles that nature plays in the economic
process as well as in the formation of
economic value.
Environmental Economics
primary focus is how to use or
manage the natural environment
(air, water, landmass) as a
valuable resource for the disposal
of waste.
Economy and Environment
economy is assumed to depend on the natural
the extraction of nonrenewable resources and
the harvest of renewable resources
the disposal and assimilation of wastes
the consumption of environmental amenities
Economy and Environment
Neoclassical Approach
Natural resources are ‘essential’ factors of
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
Neoclassical Approach
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
Neoclassical Approach
Key issues:
the market as a provider of information
about resource scarcity
resource (factor) substitution
scarcity augmenting technological
the nature of the relationships between the
human economy and the natural
Neoclassical Economics
“Invisible Hand” theorem: idealized
capitalist market economy
Freedom of choice based on self-interest
Perfect information
Mobility of resources
Ownership rights
Price signals
Free good – no price
Scarce good – positive price
Price as a signal of
emerging 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 Advance
the ability to produce a given amount of
output by using less of all inputs
conservation of resources
the amount of resource conservation depend
on the impact that technological advance has
on the relative productivity of each of the
The human economy
and the natural world
the human economy is composed of three
entities: people, social institutions and
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
Ecological Perspective
Environmental resources of the biosphere
are finite
Mutual interdependencies: everything is
related to everything else
Biosphere is characterized by a
continuous transformation of matter and
Ecological Perspective
Material recycling is essential for the
growth and revitalization of all the
subsystems of the biosphere
Nothing remains constant in nature
The human economy is a subsystem of
the biosphere
the human economy is completely and
unambiguously dependent on natural
ecological systems for its material needs
the growth of the economic subsystem is
‘bounded’ by a nongrowing and finite
ecological sphere
nature acts as both a source of and a
limiting factor on the basic material
requirements for the human economy
studies the
between living
organisms and
the physical and
environment in
which they live.
living organisms in a specified physical
the interactions among the organisms,
the nonbiological factors in the physical
environment that limit their growth and
of the
Dynamic interaction between abiotic
and biotic components
Abiotic components
habitat for organisms.
reservoir of the six most important
elements for life (C, H, O, N, S, P).
Biotic components
Producers: organisms capable of
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 thermodynamics
The first law of thermodynamics: principle
of conservation of energy - matter and
energy can neither be created nor
destroyed, only transformed.
The second law of thermodynamics:
energy transformations – in every energy
conversion some useful energy is
converted to useless (heat) energy
In all conversion of energy to work, there
will always be a certain waste or loss of
energy quality.
Useful energy cannot be recycled
Natural ecosystems require continual
energy flows from an external source
Ecology and the human
The human economy is a subsystem of
the biosphere
Natural resources cannot be viewed
merely as factors of production
Humans lead to;
Simplification of ecosystems
Creation of industrial pollution (waste)
waste-absorptive capacity of the natural
environment: ecological threshold
trade-off between economic goods and
environmental quality
Assimilative capacity of the natural
the assimilative capacity of the
environment is limited.
the assimilative capacity of the natural
environment depends on the flexibility of
the ecosystem and the nature of the
pollution reduces the capacity of an
environmental medium to withstand further
Assume a linear relationship between waste
and economic activity
W = f (X, t)
: level of waste generated
: production of goods and services
: technological and ecological factors
if t assumed constant;
W = βX
Market Economy and
Allocation of Environmental
Ownership of a resource:
ownership rights are completely specified
the rights are completely exclusive
the ownership rights are transferable
ownership is enforceable
When these four conditions are met, selfinterest based behavior of individuals will
ensure that resources are used where
they are most valued.
Environmental resources tend to be
common property resources.
The ownership of environmental
resources cannot be clearly defined.
for the common property resources,
economic pursuit on the basis of individual
self-interest would not lead to what is best
for society as a whole
the use of commons needs to be regulated
by a ‘visible hand’
Positive and Negative
Lack of excludability
In the presence of real externalities, there
will be a divergence between private and
social evaluations of costs and benefits
Positive Externality:
Social benefits = Private benefits + External benefits
External benefits > 0
Social benefits > Private benefits
Negative Externality:
Social costs = Private costs + External costs
External costs > 0
Social costs > Private costs