Environmental Environmental EconomicsEconomics

Question: Question:

What is the difference What is the difference between nonrenewable between nonrenewable and renewable resources, and renewable resources, economically speaking?economically speaking?

Fund Resources:Fund Resources:

Quantities of resources Quantities of resources are fixed in their are fixed in their natural statenatural state

Flow Resources:Flow Resources:

Resources present Resources present use doesn’t prevent use doesn’t prevent possible future use.possible future use.

Examples: Wind, rain, and sunlightExamples: Wind, rain, and sunlight

Question:Question:

What do cows and What do cows and trees have in trees have in common?common?

They both exhibit They both exhibit characteristics of flow and fund characteristics of flow and fund resources. Growing maturing resources. Growing maturing cattle may be harvested cattle may be harvested without damaging the without damaging the productivity of the parent productivity of the parent stock. (the fund)stock. (the fund)

Both of these Both of these resources are resources are considered biological considered biological resourcesresources

The product flow from The product flow from these resources can be these resources can be maintained indefinitely. maintained indefinitely. Increased or decreased Increased or decreased depending on depending on management.management.

Forests, ranges, Forests, ranges, livestock, fish and livestock, fish and wildlife yield an annual wildlife yield an annual product that may be product that may be taken without harm to taken without harm to the productive source the productive source of that output.of that output.

However, each could be However, each could be used in a manner that used in a manner that may either enhance or may either enhance or diminish the quantity and diminish the quantity and productivity of that fund productivity of that fund resource.resource.•Intense forest cuttingIntense forest cutting•Range land Range land overgrazingovergrazing

•Ranchers selling Ranchers selling breeding stockbreeding stock

Question: How about Question: How about the soil, is it a fund the soil, is it a fund

or flow?or flow?•Plant Nutrients can Plant Nutrients can increase, stay the increase, stay the same or decrease.same or decrease.

•These things are These things are like savings like savings accountsaccounts

Management of Management of Forests and other Forests and other

renewable resourcesrenewable resources

•Production EfficiencyProduction Efficiency•Responding to Responding to

economic influenceseconomic influences

What type of demands What type of demands on forests are there?on forests are there?

•Market Goods - Wood, Market Goods - Wood, Homesites, Recreational home Homesites, Recreational home sites, Big game hunting permitssites, Big game hunting permits

•NonMarket Goods – Wilderness, NonMarket Goods – Wilderness, Aesthetics, Nongame wildlife Aesthetics, Nongame wildlife habitats, water quality, Oxygen habitats, water quality, Oxygen production, Influencing air production, Influencing air qualityquality

When do you harvest a When do you harvest a tree?tree?

•When the growth rate When the growth rate of the tree is less than of the tree is less than the interest ratethe interest rate

5 % growth rate

MVP

$

When Marginal growth falls below average, replace

What makes a forest What makes a forest sustainable?sustainable?

•Sustainability occurs when Sustainability occurs when the resource inventory the resource inventory does not change over time.does not change over time.

•There may be many There may be many possible sustainable possible sustainable states, and resource states, and resource management policies entail management policies entail choosing among them.choosing among them.

Amenity Valuation – Amenity Valuation – How do we value things How do we value things that aren’t sold in the that aren’t sold in the

marketplace?marketplace?•Contingent ValuationContingent Valuation•Hedonic PricingHedonic Pricing•Travel Cost MethodTravel Cost Method

Common Property Common Property Resource ProblemsResource Problems

For many of the nation’s For many of the nation’s natural resources, natural resources, property rights are property rights are withheld from private withheld from private ownership. Owned by ownership. Owned by the Government in the the Government in the name of the publicname of the public

Common PropertyCommon Property• Federal forestsFederal forests

• Grazing LandsGrazing Lands

• Ocean and Lake fisheriesOcean and Lake fisheries

• Air we breathAir we breath

Individuals use these Individuals use these resources at rates resources at rates optimized by their own optimized by their own private costs and returnsprivate costs and returns

Factories pollute air that is Factories pollute air that is commonly ownedcommonly owned

Point and Point and Nonpoint Nonpoint PollutionPollution

Externalities and Their Externalities and Their Economic Impact on Economic Impact on

SocietySociety

Types of ExternalitiesTypes of Externalities

•ConsumptionConsumption•Both positive and Both positive and negativenegative

•ProductionProduction•Both positive and Both positive and negativenegative

ConsumptionConsumption

•Local Residents - Local Residents - BakeryBakery

ConsumptionConsumption

•Local Residents – Local Residents – Truck StopTruck Stop

ConsumptionConsumption

•Home owner – Home owner – Neighbor playing loud Neighbor playing loud musicmusic

ProductionProduction

•Steel Mill – Fishery Steel Mill – Fishery DownstreamDownstream

ProductionProduction•Paper Mill – People Paper Mill – People Living DownstreamLiving Downstream

ProductionProduction

•Bee Keeper – Apple Bee Keeper – Apple OrchardOrchard

These are Mutual Positive Production Externalities

A negative A negative production production

externality generates externality generates an external costan external cost

An external cost is one An external cost is one that does not show up that does not show up in a firm’s profit and in a firm’s profit and loss statement, yet is loss statement, yet is a real cost to someone a real cost to someone in societyin society

The impact of negative The impact of negative externalities on externalities on

productionproduction•Social CostsSocial Costs•Private CostsPrivate Costs•External Costs, whereExternal Costs, where•Social Costs = Private Social Costs = Private

Costs +External CostsCosts +External Costs

Marginal External Marginal External CostsCosts

Marginal ExternalCosts

Quantity of Output

$

Marginal Willingness to Marginal Willingness to Pay and the Social and Pay and the Social and

Private CostsPrivate Costs

Marginal PrivateCosts

Quantity of Output

$Marginal Social Costs

Marginal Willingness to Pay