Environmental and Natural Resources Economics Environmental Theory, Policy, and the Sustainable Society and Natural Resources 3rd edition Economics Steven C. Hackett M.E.Sharpe Armonk, New York London, England Copyright © 2006 by M.E. Sharpe, Inc. All rights reserved. No part of this book may be reproduced in any form without written permission from the publisher, M.E. Sharpe, Inc., 80 Business Park Drive, Armonk, New York 10504. Library of Congress Cataloging-in-Publication Data Hackett, Steven C., 1960– Environmental and natural resources economics : theory, policy, and the sustainable society / Steven C. Hackett.—3rd ed. p. cm. Includes bibliographical references and index. ISBN 0-7656-1472-3 (cloth : alk. paper) 1. Environmental economics. 2. Environmental policy. 3. Natural resources. 4. Sustainable development. I. Title. HD75.6.H33 2006 333.7—dc22 2005024132 Printed in the United States of America The paper used in this publication meets the minimum requirements of American National Standard for Information Sciences Permanence of Paper for Printed Library Materials, ANSI Z 39.48-1984. ~ BM (c) 10 9 8 7 6 5 4 3 2 1 For Mary Contents List of Tables and Figures xvii Preface xxi Part I. Theory and Fundamentals 1 1. Introduction to Environmental and Natural Resources Economics 3 Introduction 3 Fundamental Concepts 5 Some Reasons for Optimism and Some Reasons for Concern 10 Reasons for Optimism 10 Reasons for Concern 13 Overview 14 Summary 16 Review Questions and Problems 17 Internet Links 18 References and Further Reading 19 2. Value Systems and Economic Systems 21 Introduction 21 Fundamentals of Ethical Systems 22 Deontological Ethics 23 Teleological Ethics 25 A Closer Look at Utilitarianism 26 Self-Interest, the Common Good, and Social Order 30 Private Property 32 Locke and the Liberal Society 33 vii viii CONTENTS Rousseau and the Civil Society 33 On Positive and Normative Economics 35 Economic Questions That All Societies Must Answer 36 Summary 36 Review Questions and Problems 37 Internet Links 39 References and Further Reading 3. The Economics of Market Allocation 41 Introduction 41 Market Capitalism 41 Conditions Required for a Well-Functioning Competitive Market 42 Market Demand and Supply 43 Market Demand 43 Market Supply 47 Market Equilibrium and Efficiency 51 Market Equilibrium 51 Efficient Resource Allocation 52 Market Failure 55 Monopoly, Cartels, and Market Power 55 Externalities 56 Common-Pool Resources and Public Goods: Collectively Produced and/or Consumed Goods 57 Imperfect Information 58 Fairness, Equity, and Distributive Justice 58 Perspectives on Market Failures and Government Intervention 59 Summary 69 Review Questions and Problems 60 Internet Links 62 References and Further Reading 63 Appendix: A Calculus-based Derivation of Supply Curves 64 4. Externalities, Market Failures, and Policy Interventions 66 Introduction 66 Positive Externalities 66 Negative Externalities 69 Property Rights and Negative Externalities 70 Social Cost as the Sum of Private and External Cost 73 Competitive Markets Are Inefficient When There Are Negative Externalities 75 CONTENTS ix Pigouvian Taxes: The Theory of Policy Interventions for Negative Externalities 79 Summary 82 Review Questions and Problems 83 Internet Links 85 References and Further Reading 86 5. The Economics of Natural Resource Systems Part I: Theory and Concepts 88 Introduction and Overview 88 Allocating Nonrenewable Resources 90 The Industrial Organization of Energy Delivery in the United States 90 The Theory of Dynamically Efficient Nonrenewable Resource Pricing 92 Present Value Analysis 93 Dynamic Efficiency 94 Allocating Recyclable Resources 102 Allocating Renewable Resources 105 Allocating Common-Pool Resources 106 Ecosystem Services and Natural Capital 113 Resources for the Future: Factors Affecting Future Resource Scarcity 114 Summary 117 Review Questions and Problems 119 Internet Links 120 References and Further Reading 121 Appendix: The Prisoner’s Dilemma and the Tragedy of the Commons 123 Part II. Policy 127 6. The Economics of Natural Resource Systems, Part II: Marine Capture Fisheries 129 Introduction 129 World Trends 130 Bioeconomic Model of a Fishery 134 Fishery Management 139 Individual Quotas 141 Aquaculture 146 Summary 148 x CONTENTS Review Questions and Problems 149 Internet Links 150 References and Further Reading 151 7. Measurement and Analysis of Benefits and Costs 153 Introduction: Benefit/Cost Analysis 153 Efficiency 156 Maximizing Net Present Value (PV) 157 An Illustrative Example of Benefit/Cost Analysis 158 The Coase Theorem 161 Operationalizing Benefit/Cost Analysis in U.S. Environmental Policy 163 Measuring Benefits 164 Overview 164 Measuring the Health and Ecological Benefits of Regulation: Quantitative Risk Assessment (QRA) and the Value of a Statistical Life 166 Categories of Nonmarketed Environmental Benefits: Use and Nonuse Values 170 Use Values 170 Nonuse Values 170 Measuring Nonmarketed Environmental Benefits: The Contingent Valuation Method (CVM) 171 Examples of CVM Studies 174 The CVM Debate 176 Measuring Nonmarketed Environmental Benefits: The Travel Cost Method (TCM) 178 Measuring Nonmarketed Environmental Benefits: Hedonic Regression Method (HRM) 182 Other Valuation Approaches 184 Measuring Costs 186 Direct Costs 186 Indirect Costs 188 Summary 192 Review Questions and Problems 194 Internet Links 197 References and Further Reading 198 8. The Political Economy of Environmental Regulation and Resource Management 203 Introduction: What Is Political Economy? 203