UNIT 3

THE ENVIRONMENTAL DEGRADATION OF TOURISM

DESTINATIONS AS A MARKET FAILURE
3.1 Environmental functions and services
3.2 The absence of a market price as the root problem
3.3 Market failures in environmental settings

Environmental Economics in Tourist Areas (code 20521)

UNIT 3
THE ENVIRONMENTAL DEGRADATION OF TOURISM
DESTINATIONS AS A MARKET FAILURE
3.1 Environmental functions and services
3.2 The absence of a market price as the root problem
3.3 Market failures in environmental settings

Environmental Economics in Tourist Areas (code 20521)

Interaction economy/environment (Pearce, 1976)

1 As a source of energy/material inputs for

production processes.
 Goods and
- Production -

services - Consumption -

Economic
system

Matter and
energy flows
Environment

1
Interaction economy/environment (Pearce, 1976)

1 As a source of energy/material inputs for

production processes.

As a waste disposal as it can be used as a “sink”

2 into which byproducts (incidental or secondary
products) from economic activity can be discarded.
 Goods and
- Production -

services - Consumption -

Economic Waste Waste

system

Matter and
energy flows
Environment

1 2
Interaction economy/environment (Pearce, 1976)

1 As a source of energy/material inputs for

production processes.

As a waste disposal as it can be used as a “sink”

2 into which byproducts (incidental or secondary
products) from economic activity can be discarded.

As a direct source of utility as it supplies “natural

3 goods” such as beautiful landscapes, natural parks, ...
 Goods and
- Production -

services - Consumption -

Economic Waste Waste

system

Matter and Recreation

energy flows Aesthetics
Environment
3

1 2
Interaction economy/environment (Pearce, 1976)

1 As a source of energy/material inputs for

production processes.

As a waste disposal as it can be used as a “sink”

2 into which byproducts (incidental or secondary
products) from economic activity can be discarded.

As a direct source of utility as it supplies “natural

3 goods” such as beautiful landscapes, natural parks, ...

As an integrated and highly sensitive system

4
supporting all forms of life.
 Goods and
- Production -

services - Consumption -

Economic Waste Waste

system

Matter and Recreation

energy flows Aesthetics
Environment
3
4 2
1
Ecosystem services approach

Dominates policy discussions and scientific literature

(since the publication of the MEA report in 2005)
Ecosystem services approach

Dominates policy discussions and scientific literature

(since the publication of the MEA report in 2005)

Links between the economic system and the

environment:

Ecosystems

Functions/Ecosystem processes/Intermediate services

Services/Final ecosystem services

Goods

Economic benefits/Value of goods

Biodiversity as a component of ecosystems impacting

on functioning/service provision + Economic activity
impacting on this functioning.
Ecosystems are dynamic

Ecosystems are naturally in a state of flux.

Environmental changes occur for reasons due to (i)

pressures from the economic system –e.g. the impacts
of agriculture-, and (ii) external factors –e.g. changes in
solar activity.

The evolution of environmental systems is affected by

economic actions (e.g. effects of species introductions).

Economic and environmental systems “co-evolve” –

their dynamics are mutually dependent, since
changes in how ecosystems work also have feedback
effects on the economic system.
MEA report, 2005

ECOSYSTEM SERVICES

PROVISIONING:
 Food
 Fresh water
 Wood and fibre
 Fuel
 Etc.

SUPPORTING: REGULATING:
 Nutrient cycling
 Climate regulation
 Water cycling
 Flood regulation
 Soil formation
 Disease regulation
 Primary production
 Water purification
 Etc.
 Etc.

CULTURAL:
 Aesthetic (landscape, views, etc.)
 Spiritual
 Educational
 Recreation (hiking, tourism,…)
 Etc.

LIFE ON EARTH - BIODIVERSITY

MEA report, 2005

ECOSYSTEM SERVICES

PROVISIONING:
 Food
 Fresh water
 Wood and fibre
 Fuel
 Etc.

SUPPORTING: REGULATING:
 Nutrient cycling
 Climate regulation
 Water cycling
 Flood regulation
 Soil formation
 Disease regulation
 Primary production
 Water purification
 Etc.
 Etc.

CULTURAL:
 Aesthetic (landscape, views, etc.)
 Spiritual
 Educational
 Recreation (hiking, tourism,…)
Satisfaction of basic  Etc.

human needs
LIFE ON EARTH - BIODIVERSITY
MEA report, 2005

ECOSYSTEM SERVICES

PROVISIONING:
 Food
 Fresh water
 Wood and fibre Security
 Fuel
 Etc.

SUPPORTING: REGULATING:
 Nutrient cycling
 Climate regulation
 Water cycling
 Flood regulation
 Soil formation
 Disease regulation
 Primary production
 Water purification
 Etc.
 Etc.

CULTURAL:
 Aesthetic (landscape, views, etc.)
 Spiritual
 Educational
 Recreation (hiking, tourism,…)
Satisfaction of basic  Etc.

human needs
LIFE ON EARTH - BIODIVERSITY
MEA report, 2005

ECOSYSTEM SERVICES

PROVISIONING:
 Food
 Fresh water
 Wood and fibre Security
 Fuel
 Etc.

SUPPORTING: REGULATING:
 Nutrient cycling
 Climate regulation
 Water cycling
 Flood regulation
 Soil formation
 Disease regulation
 Primary production
 Water purification
 Etc.
 Etc.

CULTURAL:
 Aesthetic (landscape, views, etc.)
 Spiritual
 Educational Health
 Recreation (hiking, tourism,…)
Satisfaction of basic  Etc.

human needs
LIFE ON EARTH - BIODIVERSITY
MEA report, 2005

ECOSYSTEM SERVICES

PROVISIONING:
Social cohesion  Food
 Fresh water
 Wood and fibre Security
 Fuel
 Etc.

SUPPORTING: REGULATING:
 Nutrient cycling
 Climate regulation
 Water cycling
 Flood regulation
 Soil formation
 Disease regulation
 Primary production
 Water purification
 Etc.
 Etc.

CULTURAL:
 Aesthetic (landscape, views, etc.)
 Spiritual
 Educational Health
 Recreation (hiking, tourism,…)
Satisfaction of basic  Etc.

human needs
LIFE ON EARTH - BIODIVERSITY
Coastal zone example

www.masts.ac.uk
EXERCISE PART 1
UNIT 3
THE ENVIRONMENTAL DEGRADATION OF TOURISM
DESTINATIONS AS A MARKET FAILURE
3.1 Environmental functions and services
3.2 The absence of a market price as the root
problem
3.3 Market failures in environmental settings

Environmental Economics in Tourist Areas (code 20521)

Basing on the neoclassical economic model,
Environmental economics explains environmental
degradation through market analysis.

Market functioning is based on the consumer

sovereignty principle and markets work through a
price mechanism.

Environmental degradation as the result of the

absence of a market price for many environmental
functions and services.
Although many of these functions and services have an
economic value, this value is not “registered” by
markets.
Although many of these functions and services have an
economic value, this value is not “registered” by
markets.
Although many of these functions and services have an
economic value, this value is not “registered” by
markets.
Although many of these functions and services have an
economic value, this value is not “registered” by
markets.
Although many of these functions and services have an
economic value, this value is not “registered” by
markets.
Although many of these functions and services have an
economic value, this value is not “registered” by
markets.
Industrialized societies value natural resources basing on
their capacity to generate wealth. If there is no desire
to own or exchange them, they are treated as free
goods that are not considered in the market and, hence,
they are priceless.

The fact that many environmental functions and services

are un-priced explains why ecosystems are overused
and overexplotaited, and hence degraded.
Industrialized societies value natural resources basing on
their capacity to generate wealth. If there is no desire
to own or exchange them, they are treated as free
goods that are not considered in the market and, hence,
they are priceless.

The fact that many environmental functions and services

are un-priced explains why ecosystems are overused
and overexplotaited, and hence degraded.
Industrialized societies value natural resources basing on
their capacity to generate wealth. If there is no desire
to own or exchange them, they are treated as free
goods that are not considered in the market and, hence,
they are priceless.

The fact that many environmental functions and services

are un-priced explains why ecosystems are overused
and overexplotaited, and hence degraded.
Industrialized societies value natural resources basing on
their capacity to generate wealth. If there is no desire
to own or exchange them, they are treated as free
goods that are not considered in the market and, hence,
they are priceless.

The fact that many environmental functions and services

are un-priced explains why ecosystems are overused
and overexplotaited, and hence degraded.

Otherwise, it would avoid overuse of scarce

resources and underuse of abundant ones.
“The Economic Rationale” in The RFF Reader in
Environmental and Resource Management (edited by
Wallace E. Oates, University of Maryland and RFF):

The Economic Rationale

“The economic case for pollution taxes is really just a

straightforward corollary of the logic underlying a
market system. The proper functioning of a system of
free markets depends on the emergence of a set of
prices that accurately reflect the cost to society of the
resources used in the production of goods and services.
Prices are the basic signals in a market system that
direct the flow of resources to their most
productive use. For most goods and services, the
market forces of supply and demand generate the proper
price”.
UNIT 3
THE ENVIRONMENTAL DEGRADATION OF TOURISM
DESTINATIONS AS A MARKET FAILURE
3.1 Environmental functions and services
3.2 The absence of a market price as the root problem
3.3 Market failures in environmental settings

Environmental Economics in Tourist Areas (code 20521)

Market failures

1 Externalities

2 Public goods

3 Open access resources

Market failures

1 Externalities

2 Public goods

3 Open access resources

Externalities

Farmer George and Willy’s White Water Rafting:

Farmer George grows carrots and uses water to

irrigate the carrots on the Kent River upstream of
Willy. His profit is given by:
Profit = 10water –water2

‘water’ in this case always refers to Georges

application of water in megalitres to carrots.
Other inputs of land, labour and capital are held
constant.
Externalities

Farmer George and Willy’s White Water Rafting:

Willy hires out canoes and his profit is:

Profit = 25 - 0.8 water2

Note that George’s water appears in Willy’s profit

function: George imposes an external cost on Willy
because George’s irrigation reduces the flows in the
river and reduces the days of canoeing he can sell.
Externalities

For many environmental resources (e.g. clean air),

there is a problem with property rights: these rights
are missing, unclearly defined, poorly enforced.

This means no price is charged for the “use” of certain

environmental resources (e.g. by polluting).

Since no-one owns clean air, factories and car drivers

are not charged a price for polluting it. Yet pollution
imposes a cost on society.
Externalities

This means private costs (which determine supply

curve) no longer fully represent social costs: a
wedge exists between them, often called an
“external cost”.

“External costs” (also known as negative

externalities) can be defined as negative impacts of
consumption/production that affect the
utility/production of others, yet are uncharged
for/unpriced.

This implies that for a product whose production

involves pollution, the price is too low and pollution is
too high.
Externalities

This means private costs (which determine supply

curve) no longer fully represent social costs: a
wedge exists between them, often called an
“external cost”.

“External costs” (also known as negative

externalities) can be defined as negative impacts of
consumption/production that affect the
utility/production of others, yet are uncharged
for/unpriced.

This implies that for a product whose production

involves pollution, the price is too low and pollution is
too high.
Externalities

Pigou (1920): The case of bee-keeping.

Some plants require honey bees for fertilization. And

the production of honey requires flower blossoms.
Bee-keeping creates a positive externality for farmers
and orchard growers. On the other hand, farmers and
orchardists create a positive externality for bee-
keepers.

Although there is not any kind of economic

transaction, both bee-keepers and farmers mutually
benefit.

This externality, though ‘un-priced’, positively affects

individual welfare.
Externalities

Since no-one owns “research spillovers”, researchers

do not get any compensation for researching. Yet
research generates a benefit on society.
Externalities

This means private benefits (which determine

demand curve) no longer fully represent social
benefits: a wedge exists between them, often called
an “external benefit”.

“External benefits” (also known as positive

externalities) can be defined as positive impacts of
consumption/production that affect the
utility/production of others, yet are uncharged
for/unpriced.

This implies that for an activity that involves an

external benefit, the price (e.g. salary) is too low and
so the activity.
Externalities

This means private benefits (which determine

demand curve) no longer fully represent social
benefits: a wedge exists between them, often called
an “external benefit”.

“External benefits” (also known as positive

externalities) can be defined as positive impacts of
consumption/production that affect the
utility/production of others, yet are uncharged
for/unpriced.

This implies that for an activity that involves an

external benefit, the price (e.g. salary) is too low and
so the activity.
Externalities

Baumol and Oates (1988):

1. An externality occurs when an agent A’s utility or

production function depends on real variables whose
values are chosen by others (persons, corporations,
governments) without particular attention to A’s
welfare.

2. The agent negatively (positively) affecting A’s

welfare through her activity does not pay any fine
(get any compensation) equal to the external cost
(benefit) she imposes (generates to) on A.
Externalities

Three conditions:

1. The externality is unintended, that is, is a side-

effect from an activity carried out by an agent that
pursues to maximize her utility/profit.

2. The externality is measured in physical rather

than economic units.

3. The externality must be Pareto-relevant, that is,

it has to be possible to modify the externality-
generating activity in such a way that the affected
agent is made better off (without making the acting
party worse off). It has to be possible to achieve a
Pareto improvement.
Externalities

Direction of an externality:

Consumer  consumer (e.g. noise in an apartment

block).

Producer  consumer (e.g. firm pollutes a river

where people like to go fishing).

Consumer  producer (e.g. household pollutes a lake

where commercial fishing takes place).

Producer  producer (e.g. one firm pollutes a river

which another firm, downstream, uses as an input to
production)
Externalities

Graphical analysis about the inefficiencies

related to negative externalities
Inefficiencies related to negative externalities

Production generates pollution as a linear function of

output (no way of cutting pollution other than cutting
output).

Pollution increases as output rises; and pollution

damages rise at a constant rate. Show this as a rising
Marginal External Cost curve (MEC)

Output sells at a constant price, and Marginal Private

Costs are continuously increasing. Define Marginal
Net Private Benefit (MNPB) as ‘price minus marginal
private cost’.

Private, profit maximising optimum where MNPB = 0

Social optimum where MNPB = MEC
 Marginal Net Private Benefits curve (MNPB)
for a perfectly competitive firm:

Price MCost
Costs
P=D=MRevenue

Quantity

Benefits

Quantity
MNPB
 Marginal Net Private Benefits curve (MNPB)
for a perfectly competitive firm:

Price MCost
Costs
P=D=MRevenue

Quantity

Benefits Production level where

firm maximizes profits.
MNPB=0

Quantity
MNPB
 Marginal Net Private Benefits curve (MNPB)
for a perfectly competitive firm:

Price MCost
Costs
P=D=MRevenue

Quantity

Benefits

TNPB: Total Net

Private Benefit

Quantity
MNPB
Marginal Net Private Benefits curve (MNPB)
for a perfectly competitive firm:

Price
Costs

MNPB
MEC

Social optimum

Total Net Private Benefit (TNPB)

Marginal Net Private Benefits curve (MNPB)
for a perfectly competitive firm:

Price
Costs

MNPB
MEC

Social optimum

Total External Cost (TEC)

Marginal Net Private Benefits curve (MNPB)
for a perfectly competitive firm:

Price
Costs

MNPB
MEC

Net Social Benefit

(NSB) is maximized
(NSB=TNPB-TEC)
Marginal Net Private Benefits curve (MNPB)
for a perfectly competitive firm:

Price
Costs

MNPB
MEC

A = optimal level of net social benefit

B = optimal level of externality
A+B = optimal level of net private benefit for the polluter
C = level of net private benefit that are not socially acceptable
C+D = level of non-optimal externality which needs to be removed
by government intervention
The optimal level of pollution

What is best for society is to maximize the difference

between total (social) benefits and total (social) costs.

“A” is the largest area of net social benefit (NSB =

TNPB-TEC).

Q* is the optimal level of activity.

At the optimal level of activity, the externality “B” is not

going to disappear, because “B” is Pareto optimal.
The optimal level of pollution

What is best for society is to maximize the difference

between total (social) benefits and total (social) costs.

“A” is the largest area of net social benefit (NSB =

TNPB-TEC).

Q* is the optimal level of activity.

At the optimal level of activity, the externality “B” is not

going to disappear, because “B” is Pareto optimal.
Marginal Net Private Benefits curve (MNPB)
for a perfectly competitive firm:

Price
Costs

MNPB
MEC

NSB = TNPB – TEC = (A+B+C) – (B+C+D) = A – D<A

Inefficiencies related to negative externalities

Also…

MNPB = MEC

MNPB = P – MC

P – MC = MEC

P = MC + MEC = MSC

Hence, the Pareto optimality is achieved when

price equals marginal social costs.
Externalities

Can we correct for externalities?

1) Voluntary bargaining/Coase Theorem (1960):

- Basic idea: to optimally solve externality

problems, allocate liability (property rights) over
environmental resource.

e.g. pollution of a lake: 2 options: either

polluter has right to pollute (zero liability, Lz ) or
sufferer has right not to suffer from pollution (full
liability, Lf ).

- Coase theorem says that regardless of who the

property rights are given to, bargaining will
produce an efficient outcome.
Externalities

Can we correct for externalities?

1) Voluntary bargaining/Coase Theorem (1960):

- Under Lz, sufferer must bribe polluter not to

pollute. Minimum bribe given by MNPB,
maximum given by MEC.

- Under Lf , polluter must compensate sufferer for

damage caused. Minimum payment given by
MEC, maximum by MNPB.

- In either case, bargaining drives us to the social

optimum.
Externalities

Can we correct for externalities?

1) Voluntary bargaining/Coase Theorem (1960):

- Identification of sufferers/polluters may be difficult

(e.g. when many parties, or for cumulative pollutants)

- Transaction costs of bargaining are increasing in the

number of parties: might get Total costs > Net benefits
of bargaining. In this case, Coase said it is efficient not
to correct the externality. But this is only true for
correcting it via bargaining.

- Moral hazard problems under Lz: polluter may

threaten to increase pollution in order to extract
payments.

- Free rider problem: if benefits of avoiding damages

are non-excludable, offered bribe < value of damages
avoided.
Externalities

Can we correct for externalities?

1) Voluntary bargaining/Coase Theorem (1960):

- Identification of sufferers/polluters may be difficult

(e.g. when many parties, or for cumulative pollutants)

- Transaction costs of bargaining are increasing in the

number of parties: might get Total costs > Net benefits
of bargaining. In this case, Coase said it is efficient not
to correct the externality. But this is only true for
correcting it via bargaining.

- Moral hazard problems under Lz: polluter may

threaten to increase pollution in order to extract
payments.

- Free rider problem: if benefits of avoiding damages

are non-excludable, offered bribe < value of damages
avoided.
Externalities

Can we correct for externalities?

1) Voluntary bargaining/Coase Theorem (1960)

2) Government intervention: environmental policy

tools (taxes, subsidies, etc.).
The optimal Pigovian tax
(suggested by Arthur C. Pigou, 1920)

Pigouvian tax: the polluter pays a tax based on the

estimated damage done (external cost).

By imposing a tax (t*) on each unit of production

giving rise to pollution, the MNPB curve will shift
down to (MNPB-t*).

t* has to be paid on each unit of production, so that

the MNPB is reduced by t*.
The optimal Pigovian tax
(suggested by Arthur C. Pigou, 1920)

Pigouvian tax: the polluter pays a tax based on the

estimated damage done (external cost).

By imposing a tax (t*) on each unit of production

giving rise to pollution, the MNPB curve will shift
down to (MNPB-t*).

t* has to be paid on each unit of production, so that

the MNPB is reduced by t*.
The optimal Pigovian tax
(suggested by Arthur C. Pigou, 1920)

Price
Costs

MNPB
MEC

MNPB-t*
The optimal Pigovian tax
(suggested by Arthur C. Pigou, 1920)

To identify the tax, we need information about:

1) the damage function (MEC)

2) the MNPB: if the polluter is a firm this may be very

difficult because of commercial confidentiality of
information.
The optimal Pigovian tax
(suggested by Arthur C. Pigou, 1920)

To identify the tax, we need information about:

1) the damage function (MEC)

2) the MNPB: if the polluter is a firm this may be very

difficult because of commercial confidentiality of
information.
Market failures

1 Externalities

2 Public goods

3 Open access resources

Public goods

Many environmental goods are public goods:

Non-rivalness (in consumption): additional units of

the good can be consumed at zero social cost (social
marginal cost=0). That is, the use of one unit of the
good does not preclude others from using it. The
good can be simultaneously consumed [Ex.: clean
air, enjoyment of a coastal area]

Non-excludability: people cannot be prevented

from using the good, they cannot be excluded from
the benefits got from consuming it. [Ex.: fish shoals]
Public goods

EXCLUDABLE NON-EXCLUDABLE

RIVAL Pure private good Impure public goods

[tables, cars, houses] or open-access
resources
[fish shoals, public
grazing land, highway
system]
NON-RIVAL Club good Pure public good
[scrambled satellite [national defence, justice,
television transmissions] street lighting]
Public goods

EXCLUDABLE NON-EXCLUDABLE

RIVAL Pure private good Impure public goods

[tables, cars, houses] or open-access
resources
[fish shoals, public
grazing land, highway
system]
NON-RIVAL Club good Pure public good
[scrambled satellite [national defence, justice,
television transmissions] street lighting]
Public goods

EXCLUDABLE NON-EXCLUDABLE

RIVAL Pure private good Impure public goods

[tables, cars, houses] or open-access
resources
[fish shoals, public
grazing land, highway
system]
NON-RIVAL Club good Pure public good
[scrambled satellite [national defence, justice,
television transmissions] street lighting]
Public goods

Since everyone benefits from the services provided

by a public good and no one can be excluded from
these benefits, there is a general concern that people
will “free ride”:

A free rider is someone who conceals (hides) his or

her preferences for the good and then enjoys the
benefits without paying for them

That makes difficult the private provision of public

goods as private firms could not avoid consumption
from free-riders (those that, although benefiting
from the services provided by the public good, don’t
pay for this provision).

Free riding implies the market provides less public

good than is socially desired.
Public goods

Public goods generate positive externalities

(benefits) to society. The social benefits their
provision generates exceed profits that go with it.
Then, prices do not capture all the benefits so not
enough provision occurs.

E.g. conservation-friendly land management

Public goods

Solutions?

1) Government subsidizes production of

environmental public goods through PES (Payment
for Ecosystem Services) schemes.

2) Also, as public goods are undersupplied, the

government steps in to arrange their supply through
taxes and public expenditure.
Market failures

1 Externalities

2 Public goods

3 Open access resources

Open access
resources

Market allocation is likely to be inefficient when it is

technically impossible or too costly to deny
open access to an environmental resource (e.g.
marine fisheries, hunting reserves,… ).

Different individuals using the same natural resource

have the incentive to “capture” the benefits before
others do.

When overuse occurs due to non-excludability the

market fails to signal the true scarcity of the asset.

The potential problem associated with common

property and non-excludability has long been
recognized since it was popularized by Garrett Hardin
(1968): “The tragedy of the commons”.
Open access
resources

“Commons” refers to the environmental asset itself,

usually a piece or tract of open land.

“Common sharing property resource” or “Common

pool resource” refers to a property right regime that
allows for some collective body to devise schemes to
exclude others (e.g. right for hunting in a hunting
reserve).

“Open-access” implies there is no ownership in the

sense that everybody can use the resource.
Open access
resources

The problem appears with open-access resources, no

with common sharing property resources.

“The tragedy of the commons with open access”

Fishing grounds on the ocean

More fish caught by one party implies less fish to others.

Each fisher has incentive to increase his/her fishing effort to

capture the rents of the resource, choosing the fishing effort
that maximize its profit function (Private MgC = Private
MgB).

Total effort exceeds the socially optimal level determined by

the equimarginality rule (Social MgC = Social MgB).

The scarcity value of the resource is ignored and it is over-

fished.

Open-access resources are examples of Nash non-

cooperative games (the prisoners’ dilemma) where the
dominant strategy for each player is no-cooperation.
Open access
resources

Solutions?

Supranational authority: catch share system, fishing

licenses...
Open access
resources

Solutions?

Supranational authority: catch share system, fishing

licenses...
Open access
resources

Elinor Östrom, Nobel Prize in Economics 2009

She has challenged the conventional wisdom that

common property is poorly managed and should be
completely privatized or regulated by central
authorities. Based on numerous studies of user-
managed fish stocks, pastures, woods, lakes, and
groundwater basins, Ostrom concluded that the
outcomes are often better than predicted by
standard theories.
Open access
resources

Elinor Östrom, Nobel Prize in Economics 2009

...a proper understanding of human cooperation

requires a more nuanced analysis of individuals’
motives than has been usual in economic science,
especially regarding the nature and origin of
reciprocity...
A note on property rights…
A note on property rights…

Un-priced goods and services means they are not

exchanged (for money) in markets. No market
exists for them to be exchanged.

Hence, property rights to these goods and services

have not been defined.
A note on property rights…

Hartwick and Olewiler (1986):

We can define a property right as a bundle of

characteristics that convey certain powers to the
owner of the right.

Perman et al. (2003) [page 124]:

… These characteristics concern conditions of

appropriability of returns, the ability to divide or
transfer the right, the degree of exclusiveness of the
right, and the duration and enforceability of the
right.

Burrows (1980): «Market prices are property rights

prices»

Only excludable goods are sold and bought in

markets
A note on property rights…

Some authors state that the absence of property

rights to environmental goods and services
explains their environmental degradation.

This is a generalized belief especially after the

emergence of Coase’s Theorem.

Does it mean defining property rights, and hence

creating a market, will always correct market
failures?
A note on property rights…

Some authors state that the absence of property

rights to environmental goods and services
explains their environmental degradation.

This is a generalized belief especially after the

emergence of Coase’s Theorem.

Does it mean defining property rights, and hence

creating a market, will always correct market
failures?
A note on property rights…

Coase theorem is only valid under few restricted

assumptions: no transaction costs, few people, etc.

Besides, other works show that it is not non-relevant

whom property rights belong to.

Defining property rights to renewable resources such

as forests does not lead to an externality solution.

Common resources can be sustainably managed over

time, thus not being a problem the absence of
property rights.
EXERCISE PART 2
Basic bibliography

Azqueta, D. (2002). Introducción a la economía ambiental.

Madrid: McGraw-Hill (chapter 2)
Hanley, N., Shogren, J. F., y White, B. (2007). Environmental
economics. In theory and practice. New York: Palgrave
McMillan (chapters 1, 2 & 3)
Labandeira, X., León, C. J., y Vázquez, M. X. (2007).
Economía ambiental. Madrid: Pearson Educación, S.A.
(chapter 3)
Perman, R., Ma, Y., McGilvray, J., y Common, M. (2003).
Natural resource and environmental economics. Harlow,
England: Pearson Education Limited (chapter 5)
Reed, W. J. (1994). Una introducción a la economía de los
recursos naturales y su modelización. En D. Azqueta y A.
Ferreiro (Eds.), Análisis económico y gestión de recursos
naturales (pp. 15-32). Madrid: Alianza Editorial (chapter 1)
Riera, P., García, D., Kriström, B., y Brännlund, R. (2005).
Manual de economía ambiental y de los recursos naturales.
Madrid: Thompson Editores (chapters 2 & 4)
Romero, C. (1994). Economía de los recursos ambientales y
naturales. Madrid: Alianza Editorial (chapter 2)
Complementary bibliography

Azqueta, D. (1994a). La problemática de la gestión óptima

de los recursos naturales: aspectos institucionales En D.
Azqueta & A. Ferreiro (Eds.), Análisis económico y gestión
de recursos naturales (pp. 51-72). Madrid: Alianza
Editorial (chapter 3)
Baumol, W. J. y Oates, W. E. (1982). La teoría de la política
económica del medio ambiente. Barcelona: Antoni Bosch
(chapters 1, 2, 3 & 4)
Franco, L. (1995). Política económica del medio ambiente.
Barcelona: Cedecs Economía (chapters 1 & 2)
Jacobs, M. (1991). La economía verde. Barcelona: Icaria
(chapter 2)
Other resources

Torres, C. y Hanley, N. (2016). Economic valuation of

coastal and marine ecosystem services in the 21st
century. An overview from a management perspective.
Environmental Economics Discussion Papers 2016-1: 1-
218, University of St. Andrews (Scotland).

Also available at:

http://dea.uib.es/digitalAssets/366/366392_w75.pdf.