1_Envi-Economics-Intro_ectorio

ES 10:
PRINCIPLES OF ENVIRONMENTAL
ECONOMICS AND NATURAL RESOURCE
ACCOUNTING
INTRODUCTION
Engr. ERWIN C. TORIO, Ph.D.

Faculty, Environmental Science
Cagayan State University
What is Economics?
Economics
 is the science of the allocation of
scarce resources.
 the study of the production,

processing, distribution, and
consumption of goods/services
in an exchange system
 the study of how to make trade-

offs
2
What is Environmental Economics?
Environmental Economics
 the study of trade-offs between

environmental services and
preservation, and other
economic and social activities.
3
Trade-offs occur at every geographic scale
We are experiencing losses of habitat and the
destruction of many renewable resources
including:
 Many 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 a fast rate.
4
What is Natural Resources?
 Natural Resources
 Specific attributes of the environment that are valued or
have proven useful to humans [or have the potential to
do so]* --G. Johnston
 Aspects of nature that can be used by humans to satisfy
human wants--Hite & Mulkey

 *key to human use: technology, time, accessibility,
application, perception; conflicts often related to culture

What is Natural Resource Economics?
 Natural Resource Economics
 application of economics to manage naturally occurring
resources for human needs/wants with efficiency as the
primary goal
 efficiency may be defined in market or nonmarket terms,
focused on the short or long run, relative to current or future
generations, local or global in scope
 decision choices include maintaining the status quo, altering
the status quo, or doing nothing with focus on relevant
institutions
 evaluation always includes the costs & benefits of a decision
& to whom those costs & benefits accrue
Environmental Economics vs. Natural
Resource Economics
 Environmental Economics: economic basis for
pollution problems & policy alternatives
 Natural Resource Economics: problems of
managing common-pool* natural resources,
determining optimal rates of extraction, &
understanding resource markets
 *common-pool natural resources: difficult to
exclude access, but once extracted is no longer
available to others (groundwater, rivers, fisheries,
public forests)
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.
 The Economics of the Environment has a number of
special features that are not typical of many economic
problems:
 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.
8
Figure 1. Interrelationships between systems using acid
rain as an example
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Some Preconceived notions?
1. Optimal amount of all pollutants is zero

Not so! Given realities of our ability to produce goods and
services, it will often be worthwhile to accept some pollution
2. Economics and profits are the inherent enemy of
the environment
Not so! If market forces can be harnessed there is potential to
use economics to improve the environment
3. Economists consider only goods and services that
are bought and sold be have value
Not so! Anything people care about has value. The amount of
economic value depends on how much they are willing to
give up of other goods and services in exchange for the item
10
Basic Economics: The Market Game
 Buyer Value
Buyer profit = Buyer Value – PRICE
 Seller Value (or Cost)

Seller profit = PRICE – Seller cost
11
Classification of Natural Resources
NATURAL RESOURCES
FLOW FUND
RESOURCES RESOURCES
NONSTORABLE
RESOURCES RENEWABLE
RESOURCES
(ENVIRONMENTAL
RESOURCES) NONRENEWABLE
RESOURCES
STORABLE
RESOURCES
NONRECYCLABLE RECYCLABLE
RESOURCES RESOURCES
Classification of Resources (continued)
1. Flow Resources (nondepletable)

a. Nonstorable (sometimes called
“environmental resources”)
 Often indivisible
 Inexhaustible (in human span of time)
 Time & management relevant only to

consumption, not supply
Nonstorable Flow Resources
Ocean Scenic
Sunshine
Waves Views
“Weather” Ecosystems
Classification of Resources (cont)
1. Flow Resources (cont)

b. Storable (by nature, as in living matter;
by humans with technology)
 May be divisible
 Time & management relevant to both

to consumption & supply
 The services are what are significant
for humans
Storable Flow Resources
Geothermal
Energy
Wind
Wave
Energy
Solar Hydro Water
Hydrogen Energy
Power
Classification (cont.)
2. Fund Resources (stock or

depletable resources)
a. Exhaustible & Renewable
 Regenerative within human use
time frame
 Assumes use within minimum &
maximum thresholds
Exhaustible & Renewable Fund Resources
Timber
& Crops
Fish
Animals
(human &
Nonhuman)
Grazing
Soil & Water
Lands
Quality
Forests & some

Unique ecosystems
Classification (cont.)
2.Fund Resources (cont)
b. Exhaustible & Nonrenewable
 Relatively fixed stocks/fund within
human use time frame
(1)Nonrecyclable--Examples:
fossil-fuel energy resources (oil, natural
gas, coal, peat, many “renewable”
resources when thresholds violated)
(2)Recyclable--Examples: some minerals
(iron, aluminum, gold, silver)
Framing Natural Resource Issues
 Quantity & Quality of: Land, Water, Air, Energy

 Public vs. Private Management Question
 Trend of Magnitude of Problem:
 Persistent, Chronic, Cyclical, Declining, Growing?
 Irreversibility
 Geographic scope
 Whose problem & who decides (ethics)?
 Property rights
 Time (short vs. long run; current vs. future
generations)
Optimism vs. Concern for Environment
& Natural Resources
 Concerns
 Global warming & climate impacts
 Over-population & biodiversity loss
 Soil/water quality, Mineral/energy cost/availability
 Pollution/resource shortage impacts on social &
political institutions
 Optimism
 Legislative progress
 Toxic release rates down
 Philippines competitiveness
References:
Kahn, J. R. 2005. The Economic Approach to
Environmental and Natural Resource Economics, Third
Edition, Thompson South-Western.
Hite, J.C. and W. D. Mulkey. 2019. Natural Resource

Economics: An Introductory Textbook.
Johnston, G.M., Freshwater, D. and P. Favero (editors).

1988. Natural Resource and Environmental Policy
Analysis: Cases in Applied Economics, Westview Press,
Boulder.
22

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ES 10:

Engr. ERWIN C. TORIO, Ph.D.

 the study of the production,

 the study of how to make trade-

 the study of trade-offs between

human wants--Hite & Mulkey

application, perception; conflicts often related to culture

1. Optimal amount of all pollutants is zero

 Seller Value (or Cost)

1. Flow Resources (nondepletable)

 Inexhaustible (in human span of time)

 Time & management relevant only to

1. Flow Resources (cont)

 Time & management relevant to both

2. Fund Resources (stock or

Forests & some

 Quantity & Quality of: Land, Water, Air, Energy

Hite, J.C. and W. D. Mulkey. 2019. Natural Resource

Johnston, G.M., Freshwater, D. and P. Favero (editors).

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