1.1 Major Concepts of Natural Resource and Environment: Chapter One

CHAPTER ONE
1. INTRODUCTION
1.1 Major Concepts of Natural
Resource and Environment
What is an Environment?
The term environment comes from the French
word "environmer" which means
'surroundings'. Everything, which surrounds
us whether, living or a non-living is a
component of our environment.
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• It includes the air we breathe, the water we use for our
needs, the soil we cultivate, the flora and the fauna we
enjoy. Broadly, it is defined as "the sum of all external
conditions affecting the life, developments and survival
of an organism".
• The external conditions include both physical and
biological. By physical conditions (also called physical
environment) we mean nonliving attributes like air,
water, soil, climate, heat, light, noise, housing,
radiations, and debris, whereas the biological factors
(also called biological environment) include all types
of flora, fauna and the micro-organisms. The physical
and the biological environments are interdependent.
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For example, deforestation leads to decline in
wildlife population (biological environment) as
well as increase in atmospheric temperature
(physical environment).In the human
environment social conditions like customs,
religion, habit, and occupation are also included
since they affect the living conditions.
According to Encarta Dictionary, environment is;
Surrounding influences: all the external factors
influencing the life and activities of people,
plants, and animals.
•Natural world:the natural world especially when
it is regarded as being at risk from the harmful
influences of human activities
•Set of conditions: a set of external conditions
especially those affecting a particular activity
(usually in combination).
The home environment.
Stimulating learning environment.
In general, environment is the surroundings of an
organism, including the physical world and other
organisms. Firms and governments are very
sensitive to the environment and the impact of
businesses on it. Such an impact can be regularly
analyzed in an environmental audit or environmental
impact assessment. Environment can be classified in
to two types;
a)Physical or natural environment: Physical
environment is the product of nature where there is no
direct or indirect effect of human activity. Rocks,
minerals, temperature, humidity, wind, rain, and other
related non-living elements are example of physical
environment.
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b) Cultural or social environment: Cultural
environment is man-made like railways, population
density, cultural background of the people, the level
of technological development and factors like
personal, domestic, religious, educational, means of
transport, market facilities, economic conditions, and
policies of the government.
 What are natural resources?
 Natural resource: is a part of the environment considered
as a factor of production and able to be used commercially
(forest, natural gas, minerals, fishery, water and etc.).
They are:
 Gifts of nature
 Living and non-living things
 Exploited or can be potentially exploited
by human beings as a source of food, raw
materials, energy, etc.

Classification of natural resources
Natural resources are classified in two broad
categories.
These are:
a)Non-renewable resources:
Non-renewable resources are depletable
(exhaustible) resources. Their supply cannot
be increased in at least in the short run. They
exist as stocks. E.g. Oil, natural gas,
minerals, metals, clay and etc.

b)Renewable resources:
Renewable resources are non depletable
or non exhaustible resources, and their
supply can be increased or decreased
with time. E.g. Forest, wildlife,
Rainfall, solar energy and etc. Their
existence is in the form of flows, i.e. no
accumulated resources for usage and
there is a circular
1.2.Subject Matter of Natural Resource
and Environmental Economics
Basically, natural resource and environmental
economics has two parts; natural resource
economics and environmental economics.
 Natural resource economics is concerned with
allocation of resources in the present as well
as in the future, i.e. inter-temporal resource
allocation.
It also deals with distribution of the
outcomes of resource and decisions
related to it. Natural resource economics
is concerned with optimal utilization of
natural resources (green issues) where as
environmental economics is concerned
with regulation of pollution activities and
valuation of environmental activities;
both green and brown issues.
In the broad sense environmental economics is not
distinct from its sister discipline, natural resource
economics. But, narrowly defined environmental
economics is distinct from its sister discipline
natural resource economics in a sense that
environmental economics is concerned with
welfare economics, i.e.,
brown issues

Let we briefly examine development of the natural
resource and environment economics from the
early classical writings (the time of industrial
revolution in European) to welfare economists.
1.Classical Economics
While the emergence of natural resource and
environmental economics as a distinct sub-discipline
has been a relatively recent event, concern with the
substance of natural resource and environmental
issues has much earlier antecedents.
A central interest of classical economists
was the question of what determine
standards of living and economic growth,
and natural resource was seen as important
determinants of national wealth and its
growth. It is evident that the writings and
contribution of classical economists such as
Smith, Malthus, Ricardo and Mill played
role to the development of natural resource
economics.

Adam Smith (1723–1790) was the first
writer to systematize the argument for the
importance of markets in allocating
resources, although his emphasis was
placed on what we would now call the
dynamic effects of markets. His major
work, An Inquiry into the Nature and
Causes of the Wealth of Nations (1776),
contains the famous statement of the role
of the ‘invisible hand’.
The belief in the efficacy of the market
mechanism is a fundamental organizing
principle of the policy prescriptions of
modern economics, including resource and
environmental economics.
The label ‘classical’ identifies a number of
economists writing in the 18th and 19th
centuries, a period during which the industrial
revolution was taking place (at least in much of
Europe and North America) and agricultural
productivity was growing rapidly.
Land(sometimes referred to natural resources
in general) was viewed as limited in its
availability. This thesis is most strongly
associated with Thomas Malthus (1766–
1834), who argued it most forcefully in his
Essay on the Principle of Population (1798),
giving rise to the practice of describing those
who now question the feasibility of
continuing long-run economic growth as
‘neo-Malthusian’.
For Malthus, a fixed land quantity, an assumed
tendency for continual positive population growth,
and diminishing returns in agriculture implied a
tendency for output per capita to fall over time. In
the writings of John Stuart Mill (1806–1873) one
finds a full statement of classical economics at its
culmination.
Mill’s work utilizes the idea of diminishing
returns, but recognizes the countervailing
influence of the growth of knowledge and
technical progress in agriculture and in production
more generally.
2.Neoclassical Economics: Marginal Theory and Value
The introduction of natural resource in to neoclassical models
of economic growth occurred in the 1970s when some
neoclassical economists first systematically investigated the
efficient and optimal depletion of resources. This body of work
and the developments that have followed from it is natural
resource economics.
A series of major works published in the 1870s began the
replacement of classical economics by what subsequently
became known as ‘neoclassical economics’. One outcome of
this was a change in the manner in which value was explained.
Classical economics saw value as arising from the labor power
embodied (directly and indirectly) in output, a view which
found its fullest embodiment in the work of Karl Marx.

Neoclassical economists explained value as being
determined in exchange, so reflecting preferences
and costs of production. The concepts of price and
value ceased to be distinct. Moreover, previous
notions of absolute scarcity and value were
replaced by a concept of relative scarcity, with
relative values (prices) determined by the forces of
supply and demand. The technique of marginal
analysis was adopted allowing earlier notions of
diminishing returns to be given a formal basis in
terms of diminishing marginal productivity in the
context of an explicit production function.
Jevons (1835–1882) and Menger (1840–1921)
formalized the theory of consumer preferences
in terms of utility and demand theory. The
evolution of neoclassical economic analysis led
to an emphasis on the structure of economic
activity, and its allocative efficiency, rather than
on the aggregate level of economic activity.
Alfred Marshall (1842–1924) elaborated the
partial equilibrium supply-and-demand-based
analysis of price determination familiar to the
modern microeconomics.
A substantial part of modern environmental
economics continues to use these techniques as tools
of exposition.
3.Welfare Economics
The final development in mainstream economic
theory that needs to be briefly addressed here is the
development of a rigorous theory of welfare
economics. Welfare economics attempts to provide a
framework in which normative judgments can be
made about alternative configurations of economic
activity. In particular, it attempts to identify
circumstances under which one allocation of
resources is better (in some sense) than another.
The notion of economic efficiency, also known
as allocative efficiency or Pareto optimality,
developed by Vilfredo Pareto (1897) is what
they have come up with. This is the modern,
and rigorous, version of Adam Smith’s story
about the benign influence of the invisible
hand. Where the conditions do not hold,
markets do not attain efficiency in allocation,
and a state of ‘market failure’ is said to exist.
One manifestation of market failure is the
phenomenon of ‘externalities’.

These are situations where, because of the
structure of property rights, relationships between
economic agents are not all mediated through
markets. For example, the problem of pollution is
a major concern of environmental economics. It
first attracted the attention of economists as a
particular example of the general class of
externalities. Important early work in the analysis
of externalities and market failure is to be found in
Marshall (1890). The first systematic analysis of
pollution as an externality is to be found in Pigou
(1920). However, environmental economics did not
really ‘take off’ until the 1970s.
Environmental economics is also concerned
with the natural environment as a source of
recreational and amenity services, which role
for the environment can be analyzed using
concepts and methods similar to those used in
looking at pollution problems. Like pollution
economics, it makes extensive use of the
technique of cost–benefit analysis, which
emerged in the 1950s and 1960s as a practical
vehicle for applied welfare economics and
policy advice.
In general, the modern sub-disciplines of
natural resource economics and environmental
economics have largely distinct roots in the core
of modern mainstream economics. The former
emerged mainly out of neoclassical growth
economics, the latter out of welfare economics
and the study of market failure. Both can be
said to effectively date from the early1970s.

Ecological Economics: In the 1980s a number of
economists and natural scientists came to the
conclusion that if progress was to be made in
understanding and addressing environmental
problems, it is necessary to study them in an
interdisciplinary way. Thus, the International
Society for Ecological Economics was set up in
1989. The precise choice of name for this society
may have been influenced by the fact that a
majority of the natural scientists involved were
ecologists, but more important was the fact that
economics and ecology were seen as the two
disciplines most directly concerned with what was
Ecology is the study of distribution and
abundance of animals and plants. A central focus
is an ecosystem, which is an interacting set of
plant and animal populations and their abiotic,
non-living, the environment. The Greek word
‘oikos’ is the common root for the ‘eco’ in both
economics and ecology. Oikos means ‘household’
and it could be said that ecology is the study of
nature’s housekeeping, while economics is the
study of human housekeeping. Ecological
economics could then be said to be the study of
how these two sets of housekeeping are related to
one another.
The distinguishing characteristic of
ecological economics is that it takes as its
starting point and its central organizing
principle the fact that the economic system is
part of the larger system that is planet earth.
It starts from the recognition that the
economic and environmental systems are
interdependent, and studies the joint
economy-environment system in the light of
principles from the natural sciences,
particularly thermodynamics and ecology.
1.3.TheInter-linkagebetween
Environment and Economic Activity
Economic activity takes place within, and
is part of, the system which is the earth and
it atmosphere. In economics, the
environment is viewed as a composite asset
that provides a variety of services. It is a
very special asset since it provides the life
support systems that sustain our very
existence. In general, it provides the
following services for the economy.
It provides the economy with raw
materials, which are transformed in to
consumers’ products by the production
process, and energy, which fuel this
transformation.
It absorb waste products from the
economy or serve as sink of wastes/
residuals of production and consumption,
i.e. the raw materials and energy used in
the production process return to the
environment as waste products.
The environment also provides services
directly to the consumers. The air we
breathe, the nourishment we receive from
food and drink and the protection we drive
from shelter and clothing are all the
benefits we receive either directly or
indirectly from the environment.
It provides us aesthetic values. The
environment provides us with varieties of
amenities for which no substitute exists
(recreational service etc.).
NB: If the environment is defined broadly
enough, the relationship between the
environment and the economic system can be
considered as a closed system. For our
purpose, a closed system is one in which no
inputs (energy, matter and so on) are
received outside of the system and no
outputs are transferred outside the system.
An open system, by contrary, is one in which
the system imports and exports matters or
energy.
Fig. 1.1 The Economic system and the environment
Air
Pollution
Energy Firms
Solid
Water (Production)
Waste
Raw THE ECONOMY Output
Material Inputs
s Waste
Heat
Air
Households
Water
Amenities (Consumption) Pollution

1.4. Views on the Prospects of
the Environment
The knowledge of the relationship
between the environment and the
economy help us to design an
appropriate policy that prevents undue
depreciation of the value of these special
assets, the environment, so that it may
continue to provide aesthetic and life
sustaining services.
In line with this fact, modern
ecologists have the stand point saying
that the environment possesses a
unique “carrying capacity” to support
humans, and once that capacity is
exceeded widespread ecological
destruction occurs with disastrous
consequence for humanity. The focus
is no longer on individual societies but
on the survival of the planet.
For several decades economists have
been concerned with topics such as
exhaustible resource and pollution, but
during the last decades it has become a
researchable area. As a consequence,
with regard to the relationship between
natural and environmental resources
and economic activities there are two
views (prospects); optimistic view point
and pessimistic view point.
1.The Basic Pessimist Model
One end of the spectrum is defined by an
ambitious study published in 1972 under the
title “The limit to Growth”. Based on
techniques known as System dynamics a
large scale computer model was constructed
to simulate likely future outcome of the world
economy. The most prominent feature of
system dynamics is the use of feedback loops
to explain behavior.
The feedback loop is a closed path that
connects an action to its effect on the
surrounding conditions, which in turn, can
influence further actions. The model
concluded that;
 Within a time span of less than 100 years with
no major changes in the physical, economic
or social relationship that have traditionally
govern world development, society will run
out of the non-renewable resources on which
the industrial base depends.
This implies that when resources have been
depleted, a precipitous collapse of the
economic system will result, manifested in
massive unemployment, decreased food
production, and a decline in population as
death rate soars. There is no smooth
transition, no gradual slowing down of
activity; rather, the economic system
consumes successively larger amount of the
depletable resources until they are gone.

The characteristic behavior of the system is over-
shoot and collapse (See fig. 1.2 below).
 Piecemeal approaches to solving the individual
problem will not be successful. The authors
suggested that if the depletable resource and
pollution problem were somehow jointly solved
population would grow un-abated and the
availability of food would become the binding
constraint. In this model, the removal of one
limit merely causes the system to bump
subsequent in to another one, usually with more
dire consequence.
 Overshoot and collapse can be avoided only by
an immediate limit on population and pollution,
as well as a cessation of economic growth. The
portrait pointed shows only two possible
outcomes: the termination of growth by self-
restraint and conscious policy- an approach that
avoids the collapse or the termination of growth
by a collision with the natural limits, resulting in
societal collapse. Thus, according to this study,
one way or the other, growth will cease. The only
issue is whether the conditions under which it
will cease will be congenial or hostile.
Figure 1.2 The Limits- to- Growth Standard Run (State of the World model)
Resource
Population
Food
per
capita Pollution
Industrial
output
per capita
1900 Time 2100

NB
The model relied heavily on exponential growth
patterns and feedback effects. Exponential
growth occurs when population, economic
production, resource use, or pollution increases
by a certain percentage each year. Feedback
effects occur when two variables interact, for
example, when capital accumulation increases
economic output, which in turn leads to a more
rapid accumulation of capital.

Positive feedback effects strengthen growth
trends, whereas negative feedback effects
moderate them. Negative feedback effects,
however, may be undesirable, for example,
when limits on food supply cause population
decline through malnutrition and disease.
Exponential growth in population, industrial
output, and food demand generate declines in
resources and increasing pollution, which force
a catastrophic reversal of growth by the mid-
twenty-first century.
The report also emphasized that aggressive
policies to moderate population growth,
resource consumption, and pollution could
avoid this disastrous result, leading instead to a
smooth transition to global economic and
ecological stability. This conclusion received
far less attention than the catastrophic
predictions. The report was widely criticized
for failing to recognize the flexibility and
adaptability of the economic system and for
overstating the danger of resource exhaustion.
The report also emphasized that aggressive policies to
moderate population growth, resource consumption,
and pollution could avoid this disastrous result, leading
instead to a smooth transition to global economic and
ecological stability. This conclusion received far less
attention than the catastrophic predictions. The report
was widely criticized for failing to recognize the
flexibility and adaptability of the economic system and
for overstating the danger of resource exhaustion.
2.The Basic Optimistic Model
As a reply for the limits to growth model,
Herman Khan presented an alternative
vision in a book titled The Next 20 years: A
Scenario for America and the world. This
vision is an optimistic one based in large
part on the continuing evolution of a form
of technological progress that serves to
push back the natural limits until they are
no longer limiting.
For the most part, the optimists placed
faith in future technological progress to
tap new sources of energy, overcome any
resource limitations, and control
pollution problems. The model
concluded that the future path of
population growth is expected by Khan
and his associates to approximate an
S-shaped logistic curve (See figure 1.3
below)
Fig. 1.3 Khan Perspective on Prospective of Humanity (in fixed 1975 dollars)
2176:
15 billion people
1976: $300 trillion GNP
4.1 billion People
$3.5 trillion GNP
1776:
750 million people
$150 billion GNP

1.1 Major Concepts of Natural Resource and Environment: Chapter One

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CHAPTER ONE

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1900 Time 2100

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1976: $300 trillion GNP

4.1 billion People

$3.5 trillion GNP

750 million people

$150 billion GNP

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