NatRes Cram

Natural resource and environmental economics

The study of the supply, demand, and allocation of Earth’s natural resources.

Primary objective of the field

Understand the role of natural resources in the economy so they can be managed more sustainably over time.

Resource economics

The intertemporal allocation of renewable and non-renewable resources. Input side: how we pull raw materials out of nature over time.

Environmental economics

Residual flows and waste management. Output side: what happens after we use resources.

Resource vs. environmental economics

Input side (extraction) vs. output side (waste).

Production economics

Creating goods and services (output) from scarce resources (inputs).

Four distinguishing features of resource economists

Institutions are endogenous; externalities are ubiquitous; scarcity/time (rate of use of exhaustible resources); valuations.

Institutions are “endogenous”

They are adaptive: part of what is analyzed, not fixed in the background.

Why externalities are ubiquitous

Overlapping utility functions or attenuated (weakened) property rights.

Institutions

The “rules of the game”: laws, social habits, and systems (property rights, courts, money) that control how people interact.

Douglass North on institutions

They reduce uncertainty, transaction costs, and transformation costs.

Transaction vs. transformation costs

Costs of lawyers, contracts, security vs. costs of actually making and selling the product.

Allan Schmid on institutions

They sort out interdependencies and provide order and predictability, like a traffic cop.

Externality

An unavoidable side effect when people compete for the same limited resource; analyzed with facts, not moral blame.

Scarcity

When supply can’t meet demand at a given price, so value is always relative to other goods’ prices.

Valuation

Measuring how much people value natural resources so policymakers can design laws reflecting human values.

Self-extinction premise

A society can grow in a way that accidentally destroys the environment or resources it needs to survive.

Malthus (1798, An Essay on the Principle of Population)

Population grows exponentially; food grows only linearly.

Mayan civilization (Copán)

Over-reliance on maize, farming fragile land → deforestation and erosion → starvation, infant mortality, collapse of leadership.

Easter Island

Forests overused for housing, canoes, moving statues → erosion → food scarcity → war and collapse.

Lesson of the Mayan and Easter Island cases

Societies can plant the seeds of their own destruction by destroying the resources they depend on.

Three future environmental challenges

Climate change; water accessibility; water stress.

Moderate vs. severe water stress (UN)

Using more than 20% vs. more than 40% of accessible renewable freshwater.

Water stress projection

By 2025, about two-thirds of the world’s population in moderate or severe water stress.

Water stress cases

Aral Sea and Lake Chad.

Four issues in meeting the challenges

Limit of single nation-states; difficulty of international cooperation; problem of unilateral policies; solution through markets and pricing.

Limit of the nation-state

Problems like climate change cross borders; one country can’t fix them alone.

Problem with international cooperation

Hard to enforce; countries have different goals and there is no “world police.”

Problem with unilateral policies

Strict green laws at home (“solve thy own problem”) make local firms uncompetitive against foreign polluters.

Market solution

Use the pricing mechanism (carbon taxes, water pricing) instead of only laws and bans.

Two signals of higher prices

Now: an incentive to stop wasting. Tomorrow: rewards for cleaner, cheaper alternatives (solar, EVs).

Market incentives caveat

Profit goals don’t always match sustainability; high prices can encourage faster harvesting of rare resources.

Positive loops (vicious cycles)

Chain reactions that worsen a trend (food shortage → hoarding, eating seed crops → collapse).

Negative loops (balancing cycles)

Chain reactions that correct a problem (high prices → less use → balance).

Role of economics

ools for understanding and modifying human behavior, especially under scarcity.

Economy-environment flow diagram

Nature supplies inputs to production and consumption; both produce waste; some is recycled, some treated, the rest returns to nature.

Net waste

Waste beyond the environment’s absorptive capacity, which degrades the environment.

Main idea of the flow diagram

Economic activity always returns something to nature, and nature’s absorptive capacity is limited.

Bromley’s (2008) four trends in the field’s emergence

Resource and environmental economics merged; nature built into models; welfare economics and benefit-cost analysis developed; ecological economics emerged in parallel.

Ecological economics

A parallel field placing more emphasis on ecological limits.

Family tree of the field

Land economics → (1) conservation and management of natural resources (water, fisheries, non-renewables) and (2) public finance.

Public finance

Government’s role through taxes, spending, and regulation.

Four reasons to study natural resource economics separately

Many policy issues involve resources; resources have special features (depletable, renewable, shared); externalities are everywhere; focus on dynamics.

Property right

A bundle of powers (use, exclude, sell); a land deed is the standard example.

Private vs. common property

Owned by one person or firm vs. shared by a defined group.

Exclusivity

The owner keeps others out and bears the benefits and costs. Without it, incentives to conserve are weak.

Open access

No one owns or controls the resource (some fisheries), leading to the “tragedy of the commons.”

Ownership and regulation

When rights are unclear, government may step in.

Welfare economics

Studies how much well-being people have and how it is distributed.

Social welfare function

Weights and adds up each person’s utility to compare outcomes for society.

Pareto optimal allocation

No one can be made better off without making someone worse off.

Social welfare as surplus

Consumer surplus + producer surplus.

Consumer vs. producer surplus

Buyers’ gain beyond price paid vs. sellers’ gain beyond costs.

Where total surplus is largest

At competitive equilibrium (P*, Q*); any other point is a loss to society.

Intertemporal decisions

Trade-offs between now and later (gold now or next year; fish now or let stock grow).

Interest rate

The price of time; the return from waiting.

Compounding

FV = PV(1 + r)ᵗ.

Discounting / present value

Converting future values to today: PV = FV / (1 + r)ᵗ. Lets you compare “extract now” vs. “extract later.”

Three features of well-defined property rights

Exclusivity, transferability, enforceability. Together they give incentives for efficiency.

Transferability

The right can be sold or traded voluntarily.

Enforceability

The right is protected from seizure or encroachment.

Steel firm and resort example

The firm’s pollution costs fall on the resort, breaking exclusivity: an externality.

MCp vs. MCs

Private marginal cost (what the firm pays) vs. social marginal cost (MCp + pollution damage).

Market vs. efficient outcome with pollution

Market produces at D = MCp (Qm, Pm); efficient at D = MCs (Q*, P*). Market overproduces (Qm > Q*) and underprices (Pm < P*).

Main idea of externality graph

The market ignores part of the true cost.

Bromley’s (1991) property regimes

State property; common property; common-pool resources; open access.

State property

Owned and managed by government, in capitalist and socialist countries alike.

Common property rules

Can be formal (law) or informal (tradition, custom).

Open access (regime)

First come, first served; no one can legally restrict entry.

“Common pool” refers to

The physical nature of the resource, not who owns it.

Ostrom’s two attributes of common-pool resources

Exclusion is costly; use is subtractable.

Why common-pool resources often become open access

Exclusion is expensive.

Three reasons resources stay open access

By default (can’t be fenced, cross borders); by political choice; weak enforcement.

Scarcity rent

Income from a resource above the minimum needed to bring it into use; exists because the resource is limited.

Scarcity rent on the graph

Total surplus, TR − TC: the gap between total benefit and total cost curves.

Efficient effort (E₁)

Where marginal benefit = marginal cost; rent is largest.

Open-access effort (E₂)

Entry continues while average benefit > average cost; stops at AB = AC, where total benefits = total costs.

Two results of open access at E₂

Overexploitation (effort > E₁); scarcity rent fully dissipated.

Bison example

Illustrates unrestricted-access harvesting driving effort to E₂.

Two properties of public goods

Non-excludability; non-rivalry (indivisibility of consumption).

Public goods examples

Clean air, national defense.

Why private markets underprovide public goods

Free riding: people under-report their value, firms can’t collect revenue. Justifies public provision, regulation, or subsidies.

Monopoly inefficiency example

OPEC.

Monopoly rule vs. competitive rule

Monopoly: MR = MC. Competition: D = MC.

Deadweight loss

Surplus lost because the monopolist restricts output below the competitive level.

Government failure

Government intervention can also fail. Example: rent seeking.

Rent seeking

Interest groups spend resources lobbying for laws benefiting only them, lowering total surplus.

MRS

Ratio of marginal welfare: MU_E / MU_T = T/E.

Optimality condition

MRS = MRT (welfare curve tangent to PPF).

Interpretation of the solution

Society’s willingness to trade timber for ecotourism equals what the land can technically deliver, giving maximum welfare.

Thomas Malthus

Population grows exponentially, food linearly. Meaning: unchecked growth outruns resources, the basis of the self-extinction premise.

Douglass North

Institutions reduce uncertainty, transaction costs, and transformation costs. Meaning: shared rules make exchange cheaper, safer, and faster.

Allan Schmid

Institutions sort out interdependencies. Meaning: because choices overlap, rules bring order and predictability.

Daniel Bromley (2008)

Four trends behind the field’s emergence. Meaning: the field formed by merging subfields, modeling nature, adding welfare tools, and alongside ecological economics.

Daniel Bromley (1991)

Four property rights regimes. Meaning: who controls a resource (state, group, no one) shapes how it is used.

Elinor Ostrom

Common-pool resources are costly to exclude and subtractable. Meaning: their physical nature, not ownership, makes them prone to overuse.

Vilfredo Pareto (Pareto optimality)

No one can gain without someone losing. Meaning: a benchmark for efficient allocation, such as cars vs. clean air.