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.