Environmental and Natural Resource Economics: A Contemporary Approach

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1 Environmental and Natural Resource Economics: A Contemporary Approach Jonathan M. Harris Contents Preface PART ONE Introduction: The Economy and the Environment 1 1 Changing Perspectives on the Environment 3 Economics and the Environment 3 Two Approaches 4 The Traditional Economic Approach 5 The Ecological Economics Approach 5 A Framework for Understanding the Ecological Perspective The Circular Flow Model 6 Points of Contact Between Economic and Ecological Flows 8 The Economic Valuation Approach 9 The Ecological Economics Approach 9 Environmental Microeconomics and Macroeconomics 9 Microeconomic and Valuation Techniques 10 Environmental Macroeconomics 11 Implications of Ecologically Oriented Economics 13 A Look Ahead 13 Summary 14 Key Terms and Concepts 14 Discussion Questions 15 References 15 Web Sites 16 2 Resources, Environment, and Economic Development 17 A Brief History of Economic Growth and the Environment 17 Measuring Growth Rates 18 Factors Essential to Economic Growth 18 Growth Optimists and Pessimists 19 BOX 2-1 The Limits to Growth Model 20 A Summary of Recent Growth 22 The Future of Economic Growth and the Environment 23 Population Growth 24 Rising Resource Use 25 Increasing Energy Use 26 Dwindling Resources 26 Pollution 27 An Ecological Approach to Economic Growth and the Environment Sustainable Development 28 Sustainable Development Versus Standard Views of Economic Growth Population and Sustainable Development 29 Agriculture and Sustainable Development 29 Energy and Sustainable Development 30 Sustainable Management for Natural Resources 30 Summary 31 Key Terms and Concepts 32 Discussion Questions 32 References 33 Web Sites 34

2 PART TWO Economic Analysis of Environmental Issues 35 3 The Theory of Environmental Externalities 37 External Costs and Benefits 37 Accounting for Environmental Costs 38 Internalizing Environmental Costs 40 Positive Externalities 41 Internalizing Environmental Benefits 41 BOX 3-1 The External Costs of Motor Vehicle Use 42 Welfare Analysis of Externalities 45 Welfare Analysis Without Externalities 46 Welfare Analysis with Externalities 46 Optimal Pollution 46 Property Rights and the Coase Theorem 48 Pigovian Tax 48 The Coase Theorem 48 Applying the Coase Theorem 49 Limitations of the Coase Theorem 52 The Free Rider Effect 53 The Holdout Effect 53 Public Choice Versus Private Choice 53 BOX 3-2 Property Rights and Environmental Regulation The Coase Theorem and Equity 55 Summary 56 Key Terms and Concepts 57 Discussion Questions 58 Problems 58 References 59 Web Sites 60 4 Resource Allocation Over Time 61 Allocation of Nonrenewable Resources 61 Equilibrium in the Current Time Period 62 Balancing Present and Future Periods 63 Dynamic Equilibrium for Two Periods 66 User Costs and Resource Depletion 68 Hotelling s Rule and Time Discounting 70 Summary 73 Key Terms and Concepts 74 Discussion Questions 74 Problem 74 References 75 Web Sites 75 5 Common Property Resources and Public Goods 76 Common Property, Open-Access, and Property Rights The Economics of a Fishery 77 Incentives for Overfishing 79 Policies for Fishery Management 81 The Environment as a Public Good 82 The Economics of Rainforest Conservation 84 Social Demand for Rainforest Preservation 86 The Global Commons 88 Summary 89 Key Terms and Concepts 90 Discussion Questions 90 Problems 91 References 92 Web Sites 92 6 Valuing the Environment 93 Cost-Benefit Analysis 93 Estimating Value 94 Techniques of Valuation 95 Contingent Valuation 95 Demand-Side Methods 96 Supply -Side Methods 97 BOX 6-1 Valuing Human Health and Life 98

3 Balancing Present and Future: The Discount Rate Applying the Discount Rate 99 BOX 6-2 The Discount Rate 101 The Social Discount Rate 103 Dealing with Risk and Uncertainty 104 Defining Risk and Uncertainty 104 Calculating Expected Value 105 Comparing Costs and Benefits 107 BOX 6-3 Cost-Benefit Analysis of Arsenic in Drinking Water 108 Conclusion: How Useful Is Cost-Benefit Analysis? 111 BOX 6-4 Valuing the Global Ecosystem 112 The Positional Analysis Alternative 114 Summary 114 Key Terms and Concepts 115 Discussion Questions 116 Problem 116 References 11 7 Web Sites 118 PART THREE Ecological Economics and Environmental Accounting Ecological Economics: Some Basic Concepts 121 Natural Capital 121 Accounting for Changes in Natural Capital 122 The Dynamics of Natural Capital 123 Issues of Macroeconomic Scale 124 Measuring the Relationship Between Economic and Ecological Systems 126 Long-Term Sustainability 128 Policy Choices and Discounting the Future 129 Complexity, Irreversibility, and the Precautionary Principle 131 Summary 131 Key Terms and Concepts 132 Discussion Questions 132 References 133 Web Sites National Income and Environmental Accounting 136 Greening the National Income Accounts 136 Estimating Sustainable Economic Welfare 139 BOX 8-1 Green Accounting in the Philippines 144 Application of Environment and Resource Accounting Measures of True Income 148 Measuring Well-Being: Social and Ecological Dimensions BOX 8-2 Incorrect Accounting Leads to Incorrect Policies Summary 153 Key Terms and Concepts 154 Discussion Questions 154 Problems 155 References 156 Web Sites Modeling Economic and Ecological Systems 146 Energy and Resource Flow Analysis 159 Energy Flows and the Economic Production System 161 Input-Output Analysis 163 Modeling National and Global System 164 Economic and Ecological Modeling 166 Modeling Individual Processes 167 Modeling Complete Systems 168 Summary 170 Key Terms and Concepts 171 Discussion Questions 171 References 17 Web Sites 172

4 PART FOUR Population, Agriculture, and the Environment Population and the Environment 175 The Dynamics of Population Growth 175 Predicting Future Population Growth 178 The Theory of Demographic Transition 183 Population Growth Impact 185 BOX 10-1 U.S. Population Continues to Grow 186 Population Growth and Economic Growth 187 Does Population Growth Promote or Retard Economic Growth? Ecological Perspectives on Population Growth 190 The Impacts of Population, Affluence, and Technology 192 BOX 10-2 Humanity s Ecological Footprint 194 Population Policies for the Twenty-First Century 196 Summary 197 Key Terms and Concepts 198 Discussion Questions 198 References 199 Web Sites Agriculture, Food, and Environment 201 Feeding the World: Population and Food Supply Trends in Global Food Production 204 Land Use and Equity Issues 206 Projections for the Future 209 Future Yield Requirements 212 Agriculture s Impact on the Environment 213 Soil Erosion and Degradation 213 The Economics of Erosion and Erosion Control 214 Fertilizer Use 215 Environmental Effects of Fertilizer Use 216 Irrigation and Water Resources 219 BOX 11-1 Genetically Modified Foods: A Controversial Technology 220 Sustainable Agriculture for the Future 221 Policies for Sustainable Agriculture 223 Summary 224 Key Terms and Concepts 225 Discussion Questions 226 References 226 Web Sites 228 PART FIVE Energy and Resources Resources: Scarcity and Abundance 231 The Supply of Nonrenewable Resources 231 Physical Supply and Economic Supply 232 Economic Theory of Nonrenewable Resource Use 234 Long-Term Trends in Nonrenewable Resource Use 236 Global Scarcity or Increasing Abundance? 238 Internalizing Environmental Costs of Resource Recovery 240 The Economics of Recycling 245 Policies to Promote Recycling 247 Summary 249 Key Terms and Concepts 250 Discussion Questions 251 References 251 Web Sites 252

5 13 Energy: The Great Transition 253 Energy and Economic Systems 253 Economic and Ecological Analyses of Energy 254 Economic Perspectives on Energy Supply 255 Economic and Thermodynamic Efficiency 257 Energy Trends and Projections 258 Patterns of Energy Use 259 The Future of World Oil Production 263 The Economics of Alternative Energy Futures 266 The Central Role of Energy Prices 267 Policies for Future Energy Development 269 BOX 13-1 Nuclear Power: Coming or Going? 270 Energy Policy Options for Developing Nations 272 BOX 13-2 Implicit Discount Rates and Energy Efficiency 273 Summary 273 Key Terms and Concepts 274 Discussion Questions 275 References 275 Web Sites Renewable Resource Use: Fisheries 277 Principles of Renewable Resource Management 277 Ecological and Economic Analyses of Fisheries 279 Deriving an Economic Analysis from Biological Principles 281 The Economics of Fisheries in Practice 285 Policies for Sustainable Fisheries Management 287 Demand-Side Issues: Changing Consumption Patterns 289 Aquaculture: New Solutions, New Problems 290 BOX 14-1 Scientists Criticize Salmon Aquaculture 292 Summary 293 Key Terms and Concepts 294 Discussion Questions 294 Problems 295 References 296 Web Sites Ecosystem Management: Forest and Water Systems 298 The Economics of Forest Management 298 Forest Loss and Biodiversity 302 sox 15-1 Loss of Biodiversity 304 Economic and Demographic Pressures on Forests 305 BOX 15-2 Institutional Failures in Forest Management 306 Policies for Sustainable Forest Management 308 Supply -Side:Property Rights and Pricing Policies 308 Demand-Side: Changing Consumption Patterns 309 BOX 15-3 Forest Carbon Storage Valuation in Zimbabwe 311 Water:Depletion and Renewal 312 Increasing Supply: Aquifers and Dams 313 Demand: Always More Water? 316 Policies for Sustainable Water Management 317 Conclusion: Reconciling Economic and Ecological Principles 318 BOX 15-4 Water Scarcity, Pollution, and Politics in Mexico 319 Summary 320 Key Terms and Concepts 321 Discussion Questions 322 Problems 322 Refer ences 323 Web Sites 324

6 PART SIX Pollution: Impacts and Policy Responses Pollution: Analysis and Policy 327 The Economics of Pollution Control 327 How Much Pollution Is Too Much? 327 Picking a Pollution Control Policy 328 Marginal Costs and Benefits of Pollution Control 328 Pollution Control Policies: Standards, Taxes, Permits Transferable Pollution Permits 332 Pollution Control Policies in Practice 335 BOX 16-1 Sulfur Dioxide Emissions Trading 338 Policy Choice: Pollution Taxes Versus Tradable Permits Structuring Pollution Control Policies 341 The Impact of Technological Change 342 BOX 16-2 Grandfathering and Air Pollution Control Cumulative and Global Pollutants 344 BOX 16-3 Has Ozone Pollution Peaked? 345 Summary 347 Key Terms and Concepts 348 Discussion Questions 349 Problems 349 Web Sites 350 References Industrial Ecology 351 Economic and Ecological Views of Production 351 Making Wastes into Inputs 352 Closing the Loops: The Potential of Industrial Ecology BOX 17-1 Beverage Bottle Recycling 355 Making Agriculture Compatible with Natural Ecosystems 357 Industrial Ecology on a Global Scale 360 BOX 17-2 Integrated Farming Systems in Asia 362 Measuring the Impacts of Global Growth 364 Policies to Promote Industrial Ecology 366 BOX 17-3 The Kalundborg Industrial Ecosystem 36 Summary 370 Key Terms and Concepts 371 Discussion Questions 371 References 371 Web Sites Global Climate Change 374 Causes and Consequences of Climate Change 374 BOX 18-1 What Is the Greenhouse Effect? 375 Trends and Projections for Temperature Change 376 BOX 18-2 Pacific Islands Disappear as Oceans Rise 379 Economic Analysis of Climate Change 380 Cost-Benefit Studies of Global Climate Change Analyzing Long-Term Environmental Effects 384 BOX 18-3 Economists Statement on Climate Change 387 Policy Responses to Climate Change 388 Policy Tools: Carbon Taxes 388 Policy Tools: Tradable Permits 392 The Economics of Tradable Carbon Permits 393 Policy Tools: Subsidies, Standards, R&D, and Technology Transfer 393 BOX 18-4 The Kyoto Process 394 Summary 398 Key Terms and Concepts 399 Discussion Questions 399 Problems 400 References 401 Web Sites 402

7 PART SEVEN Environment, Trade, and Development World Trade and the Environment 405 Environmental Impact of Trade 405 Comparative Advantage and Environmental Externalities 406 Environmental Effects of Expanding Resource Exports 408 Trade and Environment: Policy and Practice 409 Product and Process Issues 410 Trade Agreements and the Environment 412 The World Trade Organization Approach 413 BOX 19-1 The Environmental Kuznets Curve Debate 414 The North American Free Trade Agreement (NAFTA) Approach 416 The European Union Approach 417 Multilateral Environmental Agreements (MEAs) 417 Strategies for Sustainable Trade 418 Greening Global Environmental Organizations 418 Local, Regional, and Private Sector Policies 419 Summary 420 Key Terms and Concepts 421 Discussion Questions 421 References 422 Web Sites Institutions for Sustainable Development 424 The Economics of Sustainable Development BOX 20-1 China and the Future of the Global New Goals and New Production Methods 428 Reforming Global Institutions 429 BOX 20-2 Community Resource Management in India 430 Promoting Environmentally Sustainable Development 433 BOX 20-3 The Global Environmental Facility 434 Local Development Projects 435 BOX 20-4 Sustainable Urban Management in Curitiba, Brazil Policies for Sustainable Development 437 Specific Policy Proposals 438 Summary 439 Key Terms and Concepts 440 Discussion Questions 440 References 441 Web Sites 442 Glossary 426 Index 456

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