Natural resource economics
Introduction to Natural Resource Economics is a presentation done by Export Agriculture 3 rd Year students in Uva Wellassa University In Sri Lanka.
Published on: Mar 3, 2016
Transcripts - Natural resource economics
• What is Natural Resource Economics ?
• Natural Resource
– Specific attributes of the environment that are
valued to humans -G. Johnston
– Aspects of nature that can be used by humans to
satisfy human wants--Hite & Mulkey
The study of the production ,processing ,
distribution and consumption of goods/services in
an exchange system
Natural Resource Economics
• Application of economics to manage naturally
occurring resources for human needs/wants
with efficiency as the primary goal.
Importance of Natural Resource
• Global warming
• Ozone Depletion
• Acid Deposition
• Conservation of Biological Diversity
Classification of Natural
1. Production Resources
• Natural resources provide economics with raw
materials that are turned into goods via process of
• Environment also provides a direct service to the
Ex:-Fuel, Fishery ,Forest, Water
2. Non Production resources
• These are the resources which do not have a
direct relationship with the production of
goods and services.
• Renewable resources
Renewable resources are natural resources that
can be replenished in short period of time
Ex:- Solar, Water, Biomass, Wind
• Non Renewable resources
Non renewable resources are natural resources
that cannot be re-made or re-grown at a scale
comparable to its consumption
Ex:- Nuclear energy, coal, Petroleum
1. Flow resource
• Often indivisible
• Inexhaustible (in human span of time)
• Time & management relevant only to
consumption, not supply
Ex:-Sunshine, Weather, Eco systems, Ocean
b. b.) storable
• May be divisible
• Time & management relevant to both to
consumption & supply
• The services are what are significant for
Storable Flow Resources
Hydrogen Energy WaterHydro
• Regenerative within human use time frame
• Assumes use within minimum & maximum
Soil & Water
Forests & some
Biological resources refer to the living
landscape, the plants, animals and other
aspects of nature and are important to
Non renewable Resources
1. Recyclable resources
• A recyclable resource is one that can be used over
and over, but must first go through a process to
prepare it for reuse.
Ex:- Glass, Aluminium
• There is no limit to the number of times these
products can be recycled
2.Non recyclable Resources
Non recyclable resources are those resources
which cannot be used after it has been used
Ex:- soil, coal, Mineral oil, Natural gases.
Quantitative Expression of Natural
• Nature of Flow resources
Ft = Rt +St +Wt
Ft=Flow resource obtained with in t time
Rt=Consumed amount of flow resources
St= stored amount of flow resources
Wt=Wasted amount of flow resources
• Nature of fund resources
𝑆𝑡 = 𝐹𝑡 − 𝑅𝑡 − 𝑊𝑡 + 𝐹𝑡
St= stored fund resource at t time
Ft=Fund resource at t time
Rt= Consumed amount of fund resource
Wt= Wasted amount of fund resource
• Nature of Biological resources
𝑆𝑡 = 𝑆0 − (𝑅𝑡 − 𝐻𝑡
St= Current biological mass
S0= Biological mass at the beginning
Ht= Harvested bio mass during t time
Rt= Net new addition of bio mass during t time
Economic Evaluation methods of
• The main conceptual principles of economic
evaluation methods of natural resources are:
1. Natural resources as asset
2. Economic approaches
3. Standard Criteria to decision making
1.Natural Resource as an Asset
• In economics environment is considered as a complex
asset that provides different services
• It is a very special asset that ensures not only our
existence but also development of economics .
• The resources are limited but our wishes are unlimited.
• Therefore there is a tendency that the speed of
extraction and use of natural resources is growing to
the maximum but the resources are limited.
• Complexity of environmental economics is
determined by meeting these contradictive
conditions and restrictions.
• It is essential to compare all costs and outcome but
also evaluate efficiency of use of natural resources.
Circular flow model of Economic activity
goods & services
Material Balance Model
• It provides better understanding about connection
between economic system and natural assets.
• Positive economics shows what is, what was and
what will be.
• Normative economics answers the question what
• Argument between these economics ensures
continuous development and both approaches are
Ex:- Positive economic approach
• In order to evaluate dynamics of use of natural
• It helps determine whether use of resources has
increased, decreased or has stayed on previous level.
Ex:-Normative economic approach
• To determine whether the speed of utilization of
natural resources is acceptable or not and also to
analyze possible ways of using natural resources.
3. Normative criteria for decision making
• If it is essential to find out whether the proposed
actions are desirable, the first step should be
determination of benefits and losses.
• If benefits are higher than losses then action is
• This simple system is economic basis in decision
• It can be formulated as follows: if B is benefit from
use of natural resources and C is costs then:
• o B>C action desirable;
• o B< C action to be rejected
• o B = C point of no losses
• All benefits and costs are evaluated taking into
consideration their effect on development of
Steps proceeded by Normative
1. Identify an optimal outcome
2. Understand extent to which institutions
produce optimal outcomes and where
3. Design appropriate policy solutions.
Static Efficiency and Dynamic
• Comparing benefit- cost analysis occur at
different points in time.
• With the consideration of time there are 2
types of efficiency decision making concepts
• An allocation of resources is said to satisfy the
static efficiency criterion if the economic
surplus derived from those resources is
maximized by that allocation.
• Economic surplus is the sum of consumer’s
surplus and producer’s surplus.
• When the equlibrium of benefit curve and
cost curve implise the efiiciency point of
• Pareto Efficiency
When the system is in equilibrium can not make
others worse off even though one can not better
• Benefit-cost analysis requires comparing
benefits and costs that usually occur at
different points in time.
• The problem is how to compare net benefits
in one period with the net benefits received in
• The traditional criterion used to find an
optimal allocation when time is involved is
called dynamic efficiency
– An allocation has achieved dynamic efficiency if it
maximizes the present value of net benefits
– Discounting is the process of calculating present
• The present value of a one-time net benefits
received n years from now is
• Present value of a net benefit received in “n”
PV [ Bn ] = Bn /(1+i)n
– Present value of steam of net benefits receive over
“n” period of n year
PV [B1 - Bn ] = ∑ Bn /(1+i)n
i = interest rate.
• According to the dynamic efficiency criterion,
the efficient allocation is that maximize present
value of net benefits.
• The present value of net benefit for both years
is simply the sum of present value in each of the
period1 period2p p
P.V of net benefit curve (p1)
P.V of net benefit curve (p2)
• Effective use of natural resources promotes
development of a country.
• Ineffective use of natural resources decreases
potential of sustainable development of a country.
• Ineffective use of resources can also cause
considerable losses to environment and economics.
• Tietenberg, T. (2005) Environmental and natural
resource economics -6th edition-Pearson
• Callan,S.J. &Thomas,J.M. 2004 Environmental
Economics & Management-3rd edition, Phoenix
• K.K.H.M. Rathnayake UWU/EAG/12/0032
• Subadharshani.M UWU/EAG/12/0038