Natural Resource and Environmental Economics Third Edition Roger Perman Yue Ma James McGilvray Michael Common PEARSON Addison Wesley Harlow, England London New York Boston San Francisco Toronto Sydney Tokyo Singapore Hong Kong Seoul Taipei New Delhi Cape Town Madrid Mexico City Amsterdam Munich Paris Milan
Preface to the Third Edition Acknowledgements Notation Xlll xv xvi xix Part I Foundations Chapter 1 Chapter 2 An introduction to natural resource and environmental economics 1.1 Three themes 1.2 The emergence of resource and environmental economics 1.3 Fundamental issues in the economic approach to resource and environmental issues 1.4 Reader's guide The origins of the sustainability problem 2.1 Economy-environment interdependence 2.2 The drivers of environmental impact 2.3 Poverty and inequality 2.4 Limits to growth? 2.5 The pursuit of sustainable development 3 3 3 4 10 12 14 15 16 16 16 17 28 41 44 48 52 52 54 54 Chapter 3 Ethics, economics and the environment 56 56 56
3.1 Naturalist moral philosophies 3.2 Libertarian moral philosophy 3.3 Utilitarianism 3.4 Criticisms of utilitarianism 3.5 Intertemporal distribution Appendix 3.1 The Lagrange multiplier method of solving constrained optimisation problems Appendix 3.2 Social welfare maximisation 57 58 59 64 67 75 75 76 77 77 80 Chapter 4 Concepts of sustainability 82 4.1 Concepts and constraints 4.2 Economists on sustainability 4.3 Ecologists on sustainability 4.4 The institutional conception 4.5 Sustainability and policy 82 82 83 86 92 96 97 103 103 104 104 Chapter 5 Welfare economics and the environment 105 Part I Efficiency and optimality 5.1 Economic efficiency 5.2 An efficient allocation of resources is not unique 5.3 The social welfare function and optimality 5.4 Compensation tests Part II Allocation in a market economy 5.5 Efficiency given ideal conditions 5.6 Partial equilibrium analysis of market efficiency 5.7 Market allocations are not necessarily equitable Part III Market failure, public policy and the environment 5.8 The existence of markets for environmental services 5.9 Public goods 5.10 Externalities 5.11 The second-best problem 5.12 Imperfect information 5.13 Government failure Appendix 5.1 Conditions for efficiency and optimality 105 105 105 107 109 112 113 116 116 119 122 124 124 126 134 142 143 144 145 146 146 146 147
vi! Appendix 5.2 Market outcomes Appendix 5.3 Market failure 152 153 Part II Environmental pollution Chapter 6 Chapter 7 Pollution control: targets 6.1 Modelling pollution mechanisms 6.2 Pollution flows, pollution stocks, and pollution damage 6.3 The efficient level of pollution 6.4 A static model of efficient flow pollution 6.5 Modified efficiency targets 6.6 Efficient levels of emissions of stock pollutants 6.7 Pollution control where damages depend on location of the emissions 6.8 Ambient pollution standards 6.9 Intertemporal analysis of stock pollution 6.10 Variable decay 6.11 Convexity and non-convexity in damage and abatement cost functions 6.12 Estimating the costs of abating pollution 6.13 Choosing pollution targets on grounds other than economic efficiency Appendix 6.1 Matrix algebra Appendix 6.2 Spatially differentiated stock pollution: a numerical example Pollution control: instruments 7.1 Criteria for choice of pollution control instruments 7.2 Cost efficiency and cost-effective pollution abatement instruments 7.3 Instruments for achieving pollution abatement targets 7.4 Economic incentive (quasi-market) instruments 7.5 Pollution control where damages depend on location of the emissions 7.6 A comparison of the relative advantages of command and control, emissions tax, emission abatement subsidy and marketable permit instruments 165 165 165 167 169 170 171 174 177 177 179 181 186 187 189 193 194 195 196 196 196 201 202 202 202 203 204 206 217 228 234 238 239 240
:ontents Chapter 8 Appendix 7.1 The least-cost theorem and pollution control instruments Pollution policy with imperfect information 241 242 247 8.1 Difficulties in identifying pollution targets in the context of limited information and uncertainty 8.2 Sustainability-based approaches to target setting and the precautionary principle 8.3 The relative merits of pollution control instruments under conditions of uncertainty 8.4 Transactions costs and environmental regulation Discussion question 247 247 248 249 251 261 266 267 268 268 Chapter 9 Economy-wide modelling 269 9.1 Input-output analysis 9.2 Environmental input-output analysis 9.3 Costs and prices 9.4 Computable general equilibrium models Appendix 9.1 A general framework for environmental input-output analysis Appendix 9.2 The algebra of the two-sector CGE model 269 269 270 274 278 281 290 290 290 291 291 295 Chapter 10 International environmental problems 297 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 International environmental cooperation Game theory analysis Factors contributing to enhancing probability of international agreements or achieving a higher degree of cooperation International treaties: conclusions Acid rain pollution Stratospheric ozone depletion The greenhouse effect International trade and the environment Learning outcomes 297 297 298 299 311 312 312 319 321 339 342 343 345
Ix Appendix 10.1 Some algebra of international treaties 346 346 Part III Project appraisal Chapter 11 Chapter 12 Chapter 13 Cost-benefit analysis 11.1 lntertemporal welfare economics 11.2 Project appraisal 11.3 Cost-benefit analysis and the environment Appendix 11.1 Conditions for intertemporal efficiency and optimality Appendix 11.2 Markets and intertemporal allocation Valuing the environment 12.1 Dimensions of value 12.2 The theory of environmental valuation 12.3 Environmental valuation techniques 12.4 The travel cost method 12.5 Contingent valuation 12.6 Other techniques Appendix 12.1 Demand theory and environmental evaluation Irreversibility, risk and uncertainty 13.1 Individual decision making in the face of risk 13.2 Option price and option value 13.3 Risk and irreversibility 13.4 Environmental cost-benefit analysis revisited 13.5 Decision theory: choices under uncertainty 13.6 A safe minimum standard of conservation 351 351 351 352 362 373 385 386 387 387 388 395 399 399 399 400 403 411 411 420 435 440 440 441 441 442 444 444 444 445 448 451 457 459 461 464 465 466 466
Appendix 13.1 Irreversibility and development: future known Appendix 13.2 Irreversibility, development and risk 467 468 Part IV Chapter 14 Natural resource exploitation The efficient and optimal use of natural resources 473 Part I A simple optimal resource depletion model 14.1 The economy and its production function 14.2 Is the natural resource essential? 14.3 What is the elasticity of substitution between K and R1 \AA Resource substitutability and the consequences of increasing resource scarcity 14.5 The social welfare function and an optimal allocation of natural resources Part II Extending the model to incorporate extraction costs and renewable resources 14.6 The optimal solution to the resource depletion model incorporating extraction costs 14.7 Generalisation to renewable resources 14.8 Complications 14.9 A numerical application: oil extraction and global optimal consumption Appendix 14.1 The optimal control problem and its solution using the maximum principle Appendix 14.2 The optimal solution to the simple exhaustible resource depletion problem Appendix 14.3 Optimal and efficient extraction or harvesting of a renewable or non-renewable resource in the presence of resource extraction costs 473 473 474 474 474 475 476 480 486 487 489 490 491 495 495 496 496 496 503 504 Chapter 15 The theory of optimal resource extraction: non-renewable resources 506 15.1 A non-renewable resource two-period model 15.2 A non-renewable resource multi-period model 15.3 Non-renewable resource extraction in perfectly competitive markets 15.4 Resource extraction in a monopolistic market 15.5 A comparison of competitive and monopolistic extraction programmes 506 506 510 512 517 518 518
xi Chapter 16 Chapter 17 15.6 Extensions of the multi-period model of non-renewable resource depletion 15.7 The introduction of taxation/subsidies 15.8 The resource depletion model: some extensions and further issues 15.9 Do resource prices actually follow the Hotelling rule? 15.10 Natural resource scarcity Appendix 15.1 Solution of the multi-period resource depletion model Appendix 15.2 The monopolist's profit-maximising extraction programme Appendix 15.3 A worked numerical example Stock pollution problems 16.1 An aggregate dynamic model of pollution 16.2 A complication: variable decay of the pollution stock 16.3 Steady-state outcomes 16.4 A model of waste accumulation and disposal Discussion question Problem Renewable resources 17.1 Biological growth processes 17.2 Steady-state harvests 17.3 An open-access fishery 17.4 The dynamics of renewable resource harvesting 17.5 Some more reflections on open-access fisheries 17.6 The private-property fishery 17.7 Dynamics in the PV-maximising fishery 17.8 Bringing things together: the open-access fishery, static private-property fishery and PV-maximising fishery models compared 17.9 Socially efficient resource harvesting 17.10 A safe minimum standard of conservation 17.11 Resource harvesting, population collapses and the extinction of species 17.12 Renewable resources policy 520 525 526 527 529 532 533 533 533 534 535 536 537 537 537 538 544 544 548 553 554 554 554 555 555 555 557 560 561 566 569 570 578 579 580 582 584 586 592 593 595 595
Chapter 18 Appendix 17.1 The discrete-time analogue of the continuous-time fishery models examined in Chapter 17 Forest resources 18.1 The current state of world forest resources 18.2 Characteristics of forest resources 18.3 Commercial plantation forestry 18.4 Multiple-use forestry 18.5 Socially and privately optimal multiple-use plantation forestry 18.6 Natural forests and deforestation 18.7 Government and forest resources Appendix 18.1 Mathematical derivations Appendix 18.2 The length of a forest rotation in the infinite-rotation model: some comparative statics 596 598 598 598 599 601 605 612 615 615 619 619 620 620 621 622 623 Chapter 19 19.1 19.2 19.3 19.4 19.5 Accounting for the environment Environmental indicators Environmental accounting: theory Environmental accounting: practice Sustainability indicators Concluding remarks Appendix 19.1 National income, the return on wealth, Hartwick's rule and sustainable income Appendix 19.2 Adjusting national income measurement to account for the environment Appendix 19.3 The UNSTAT proposals References Index 626 626 627 627 631 640 650 656 658 659 659 660 663 666 671 689