Introduction
Aseffa Seyoum (PhD), Natural Resource Economist
Part I: Basic Concepts & Economic Theories
Introduction
Market Allocation of Natural Resources
Property rights and Externalities
Market Failures, and Policy Intervention
Part II: Valuation of Ecosystem Services
Provision of ecosystem services
Steps of ecosystem services valuation
Economic valuation techniques
Revealed preference techniques
Stated preference techniques
National Academy of Science (2004) Valuing Ecosystem Services:
Toward Better Environmental Decision-Making
Steven C. Hackett. 2006. Environmental and Natural Resources
Economics : theory, policy, and the sustainable society. 3rd edition.
Tom Tietenberg and Lynne Lewis (2009). Environmental and
Natural Resource Economics, 8th edition
Economic activity takes place within, and is part of, the
system which is the earth and its atmosphere.
This system we call ‘the natural environment’, or more briefly
‘the environment’.
This system itself has an environment, which is the rest of the
universe.
Introduction
The environment is a thermodynamically closed
system, exchanging energy (but not matter)
with its environment.
The economy is located within the
environment.
The environment provides four functions to the
economy
1. source of resource inputs
2. source of amenity services
3. receptacle for wastes
4. provides life support services
These environmental functions interact with
one another in various ways, and may be
mutually exclusive
There exist possibilities to substitute
reproducible capital for ‘natural capital’
What are the traditional stereotypes regarding ecology, economics
and the environment?
Economics is the study of how humans allocate scarce resources
among competing uses to maximize their utility from a limited
resources. Economics deal with subset of ecology.
The key issue in economics is that the choice problem of how to
allocate is implied by the condition of scarcity, and so economy or
minimization of waste occurs when resources are allocated to their
highest-valued use.
While markets are a prominent way of making allocation choices in
the context of scarcity, economics encompasses the study of both
market and non-market allocation of scarce resources.
Economic analysis of the environment is challenging and
important because its value is not always conveniently revealed in
a market, and thus is subject to inappropriate use.
Natural resource economics/resource economics is concerned
with the economy’s extraction from the environment and with
the problems associated with the use of natural resources.
Governing common-pool natural resources, of finding dynamically
optimal rates of renewable or nonrenewable resource extraction,
and of the workings of re source and energy markets.
Natural resource economics is mostly concerned with the best
way of exploiting renewable and non-renewable resources.
Application of economic theory and quantitative methods to
determine the optimum allocation and distribution of natural
resources
Environmental economics is concerned with the economy’s
insertion into the environment and deal with environmental
pollution.
Emerged with the rise of environmental concerns in the
1960s.
It deals with the impact of economic activity on the environment
as well as the influence of the environment on economic activity
and human welfare.
Environmental economics studies also the application and
performance of incentive regulatory practices, such as pollution
taxes, liability, or cap-and-trade systems.
It also studies benefits of environmental improvements or the
costs of pollution externalities.
Ecological economics is the study of human housekeeping and
nature housekeeping, Ecology is the study of nature‘s housekeeping.
It can be defined as the study of relations of animals and plants to
their organic and inorganic environment.
Emerged within the last decade or so, ecological economics has
emerged as a new sub-discipline of environmental economics.
It emphasizes the constraints that the natural ecosystem,
understanding the economics of natural capital and the ecosystem
goods and services that flow from it.
Environmental resources:
Natural environment comprises two types of resources:
renewable resources and non-renewable resources.
Renewable natural resources are biological resources that have a
capacity for regeneration
Non-renewable resources are finite in terms of supply.
Exhaustible resources, recyclable resources and non-renewable
resources with renewable service flows
Non-renewable resources with renewable service flows include
land, seas and rivers.
A renewable resource can become non-renewable if poorly
managed.
• What sort of questions and problems are studied in the area
of environmental economics?
• Pollution and externalities – causes, consequences, instruments
for their control, policy, political economy
• What sort of questions and problems are studied in the area
of natural resources economics?
• Production, markets, management, uses, and abuses of natural
resources such as marine and freshwater fisheries, forests,
grazing lands, energy and minerals
• What sort of questions and problems are studied in the area of
ecological economics?
• Understanding and restoring stocks of natural capital, from
which flow various forms of ecosystem goods and services.
• What are some examples of ecosystem goods and services?
• What are some examples of environmental economics problems
in Ethiopia that need to be resolved?
• What are some examples of natural resource economics problems
in Ethiopia that need to be resolved?
Basic issues to be considered in dealing with
environmental/natural resource economics problems
To correctly conceptualize the problem
Estimate carrying capacity and current economic activities
How does economic system respond to scarcity?
Can the economics and political systems work to eradicate
poverty while respecting our obligation to future generation?
Severity of the problem and effective possible solutions
Economic Theory
Environmental Nat. Resource
Economics Economics
Both based on Neoclassical Economics
Accounting for environment How to use efficiently nat.
in the Economy resources:
Problems of pollution Optimisation/ec. Sustainability
Externalities Optimal Rotation Age
Instrument Hotelling Rule
Environmental Econ. Ecological Econ.
Neoclassical Rationality Bounded Rationality
Behaviour is assumed reliable Clear cognitive limitations
(rational) Routines, rule based behavior
maximising human welfare Multiple rationalities-
Use of economic incentives to multiple approaches
change distractive behaviour Context dependant
Not influenced by society (family market, state)
(methodological Rationality as “sufficient
individualism) reason”
Cost-Benefit analysis is always
possible Communicative Rationality
Environmental Econ. Ecological Economics
Individual is relevant Preferences are not given (I
She knows her preferences & We)
Problem is about how to reveal
them (no distortion; We often do not know them
Samuelson) in relation to the
Contingent Valuation Environment
Travel-Cost Incommensurability
Hedonic Pricing Multi Criteria A.
Deliberative Methods
Environmental Econ. Ecological Econ.
• Markets & market instruments have
Focuses on how to remedy huge potentials for solving
market failures environmental problems
Nevertheless strong faith But:
in markets as governance • Markets (private) just one
mechanism governance mechanism
(Certificates; Eco. Taxes)
• The more interdependence
(externalities) the less suitable is the
market
• Markets shape rationalities (in a
direction not suitable for the env.)
Environmental Econ. Ecological Econ.
L L
C C
Substitutability vs. No-Substitutability
=> Optimistic: technology &
=> Pessimistic: limits to growth
substitution
Environmental Econ. Ecological Econ.
Weak Sustainability Strong sustainability:
We can substitute endlessly Limited substitution
Sustainability = possibilities
∆K+∆R≥0 Strong sustainability
Constant Consumption
Flow not Stock is important impossible (K + R = const.)
Environmental Econ. Ecological Econ.
Economic sustainability Three Pillars of Sust.
Technical Term Ecological
Can be calculated Economic
Determined by Social
Economist Ec. as a subsystem
interdisciplinary
Needs to be determined
by society
Environmental Econ. Ecological Econ.
Necessary for making project For one person/generation
comparable Ok, but how to compare?
Allows comparing of Discriminates towards future
opportunity costs generations
Preference to consume now
Risk of future pay-offs Why is our utility more
valuable then that of future
generations
Environmental Econ. Ecological Econ.
Static Efficiency Stock Maintenance
Allocative Efficiency Impossible but minimisation
(e.g. externalities as a Maintenance Efficiency
source of inefficiency) (Throughput Minim.)
Allocative Efficiency
(Steady State Economy) Production Efficiency
(Durability; Eco Efficiency
Distributive Efficiency
What is scarcity?
• Scarcity means not having enough of something to provide for all
that is wanted.
• Something is said to be scarce if it were offered to people at no
cost, more would be wanted than is available.
• Scarcity makes choice unavoidable!
• Economic analysis requires a system of value from which we can
compare alternatives and so distinguish good from less good
allocations.
If something has a price in a market, does that generally mean
that it is scarce?
What sort of things that occur outside of markets are scarce?
Since scarcity forces us to make choices from a set of
alternatives, on what basis can we (or do we) rank the various
alternatives and choose the best one?
Economics occurs in the context of value systems that guide us
in ranking alternatives and in distinguishing better allocations.
Where do these values come from?
What is opportunity cost?
When something scarce is allocated to one particular
use, the opportunity cost of that choice is the value of
the best alternative given up.
The rationality of a particular choice by comparing the
benefits that it generates relative to its opportunity cost.
Opportunity cost can be easy or very difficult to
measure.
What is an example of an opportunity cost?
Economic rationality refers to choices made in the context of
scarcity where the benefits to the decision maker are perceived to
exceed cost.
Economic rationality is a behavior that is intended to be consistent
with the values and objectives of the decision maker, given the
information that is available to the decision maker.
Consumer theory starts from the premise that consumers wish to
maximize their overall level of satisfaction, or utility, as constrained
by their income and by market prices, while firms wish to maximize
their profits.
