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Centre for Development, Environment and Policy (CeDEP)

Natural Resource Economics

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This module develops a rationale for, and explains the methodologies used in, the application of economic theory to the allocation of natural resources.

The main emphasis is placed on enhancing the learner's ability to evaluate critically a rapidly growing, but technical, area of the economic literature. In order to achieve this, the rationale for the use of economic concepts, theory and models is first developed.

Using a series of resource sectors as examples, a number of economic models are then explained in detail in a way that is intended to raise the learner's confidence in the interpretation and assessment of various policy insights that are derived from the models.

Practical policy applications are used throughout the module in order to bridge the gap between theory and practice. Also whilst developing and applying the microeconomic applications in depth, a number of 'departures' from basic models are explored throughout the module in the context of the 'sustainable development' debate.

Objectives and learning outcomes of the course

By the end of this module you should be able to:

  • discuss the extent of and critically appraise factors contributing to, natural resource scarcity
  • develop and argue a rationale for the use of natural resource economics theory and methods
  • critically apply the insights gained from the economic methods used in the temporal and inter-temporal theories of resource allocation to the analysis of natural resource use problems
  • critically examine how an economist can contribute to the development of policy that supports sustainable development
  • assess critically the limitations of the neo-classical paradigm in the allocation of resources and demonstrate an in-depth understanding of how current research initiatives are attempting to overcome these limitations.

Scope and syllabus

This module starts by introducing key concepts in natural resource economics. After a brief classification of natural resources we look at the concept of sustainability and the intellectual foundations of natural resource economics, identifying what distinguishes the discipline from environmental economics and ecological economics. This is followed by an examination of the interconnections between the economy and the environment, including the services that the environment supplies to the economy.

When applied in research and policy analysis natural resource economics relies on empirical evidence and is a quantitative discipline. Thus the second unit of the module takes time to introduce and refresh the methods and tools of natural resource economics thoroughly including the application of mathematics and spreadsheet-based modelling.

Next the module examines the concepts of sustainability and sustainable development and reflects upon the various debates and arguments that surround these contentious concepts. The first section of Unit 3 provides a broad introduction to the subject noting the difficulties of defining sustainability and highlighting the different perspectives from which the concept can be studied and analysed. The next section narrows the focus down to an economic perspective, looking at some basic economic models of sustainability, including models of optimal growth. The final section concludes by looking at how sustainability is conceived and measured in the ecological sciences and considers what insights ecology might hold for the limits to growth.

The theoretical foundations that underpin most of the economic analysis that takes place in relation to natural resource management originate from welfare economics. The module reviews some of the key philosophical assumptions that inform economic approaches to welfare analysis and builds on this by explaining what economists typically mean by efficiency and how efficiency relates to the concept of welfare and equity. It also looks at why competitive markets are viewed as a benchmark for achieving efficiency and also at why markets are not always able to deliver efficiency. This leads to a consideration of alternative non-market arrangements for allocating resources, in particular, other institutions and an assessment of how they compare in efficiency terms.

The concepts and tools examined in the first parts of the module are then applied to analysis of the exploitation and management of different natural resources. First the focus falls on the economic characteristics of non-renewable natural resources and what distinguishes them from renewable resources. Key concepts and ideas reviewed include resource rents and dynamic efficiency, and the Hotelling model which serves as the foundation for much of the economic analysis in this module. Conclusions are drawn about the concept of economic scarcity and its drivers for the non-renewables sector.

Moving on, the module then explores the bio-economic characteristics of critical zone renewable natural resources. It examines the complex relationships that policy-makers need to take into account in developing policy that ensures efficient resource allocation. For this, static and dynamic models that aid the formulation of appropriate policy are examined, along with their key limitations.

Continuing the analysis of renewable resources, the module covers the resources provided by forests and other wooded land. Plantation forests are renewable resources but have a range of characteristics that differentiate their assessment, management and utilisation from other renewable resources such as fisheries. Natural and undisturbed forests provide a resource that has conventionally been regarded as a renewable resource in the past, but when multiple non-timber benefits and ecosystem services are considered discussion centres on what is irreplaceable and thus a non-renewable resource, at least in the short and medium term. Consideration is given to the policy mix necessary to achieve more socially optimal management of forest resources in meeting the long-term goals and needs of society.

Finally, the module critically assesses the attempts that have been made by economists to modify national income accounting conventions so as to create a measure of sustainable income. The resulting guidelines for 'environmental accounting', also known as 'natural resource accounting' and 'green accounting' are summarised and assessed in relation to the goal of sustainable development. Alternative measures of 'genuine saving' or 'genuine investment' that have been proposed as indicators of sustainable national income and welfare are also reviewed. Thus the last unit considers how economists have explored whether measurement of wealth can be made more holistic by taking into account all forms of capital, including natural, human and social capital. Parallel approaches that involve the compilation and use of biophysical indicators of sustainability without integration into national economic accounts are also considered.

List of Units

Unit 1: Key Concepts
Unit 2: Approaches and Methods
Unit 3: Sustainability
Unit 4: Welfare Economics I - Concepts and Efficiency
Unit 5: Welfare Economics II - Markets and Institutions
Unit 6: Non-renewable resources
Unit 7: Static models of renewable resource allocation
Unit 8: Fisheries revisited: dynamic optimisation approaches
Unit 9: Forest Resources
Unit 10: Environmental Accounting

Module sample

P505 module uses a core text which is specially written and will take you through your self-directed study. Exercises, assignments and other activities, such as self-assessment questions, film clips and animations are included to help you with learning. Most module study guides are now provided in electronic format on a USB flash memory stick, but can also be downloaded from the online learning environment. Click the linked image below to view a sample of our e-study guide: