Natural Resource and Environmental Economics www.booksites.net Roger Perman Yue Ma James McGilvray Michael Common 3rd edition 3rd edition • Substantial extensions to existing chapters, including a thorough account of game theory and its application to international environmental problems; fuller treatments of renewable resource and forestry economics; and greater emphasis on spatial aspects of pollution policy • New pedagogical features including learning objectives, chapter summaries, further questions and more concise boxed cases This text has been written primarily for the specialist market of second and third year undergraduate and postgraduate students of economics Roger Perman is Senior Lecturer in Economics, Strathclyde University His major research interests and publications are in the field of applied econometrics and environmental economics Yue Ma is Associate Professor in Economics, Lingnan University, Hong Kong, and Adjunct Professor of Lingnan College, Zhongshan University, China His major research interests are international banking and finance, as well as environmental economics for developing countries New accompanying website at www.booksites.net/perman provides a rich variety of resources for both lecturers and students • Case studies and examples are used extensively, highlighting the application of theory • Further readings, discussion questions and problems conclude each chapter • Detailed mathematical analysis is covered in appendices to the relevant chapters • Writing style and technical level have been made more accessible and consistent The late James McGilvray was Professor of Economics at Strathclyde University He made important contributions in the fields of input-output analysis, social accounting and economic statistics, and to the study of the economics of transition in Central and Eastern Europe Cover Image © Getty Images www.booksites.net www.pearsoneduc.com Michael Common Michael Common is Professor in the Graduate School of Environmental Studies at Strathclyde University His major research interests are the development of ecological economics and policies for sustainability • James McGilvray New chapters on pollution control with imperfect information; cost-benefit analysis and other project appraisal tools; and stock pollution problems Yue Ma • Natural Resource and Environmental Economics Features: Roger Perman Natural Resource and Environmental Economics is among the leading textbooks in its field Well written and rigorous in its approach, this third edition follows in the vein of previous editions and continues to provide a comprehensive and clear account of the application of economic analysis to environmental issues The new edition retains all of the topics from the second edition but has been reorganised into four Parts: I Foundation II Environmental Pollution III Project Appraisal IV Natural Resource Exploitation Natural Resource and Environmental Economics Roger Perman Yue Ma James McGilvray Michael Common 3rd edition www.booksites.net Natural Resource and Environmental Economics We work with leading authors to develop the strongest educational materials in resource and environmental economics, bringing cutting-edge thinking and best learning practice to a global market Under a range of well-known imprints, including Addison-Wesley, we craft high quality print and electronic publications which help readers to understand and apply their content, whether studying or at work To find out more about the complete range of our publishing, please visit us on the World Wide Web at: www.pearsoneduc.com Natural Resource and Environmental Economics Third Edition Roger Perman Yue Ma James McGilvray Michael Common Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoneduc.com First published 1996 Longman Group Limited Second edition 1999 Addison Wesley Longman Limited Third edition 2003 Pearson Education Limited © Longman Group Limited 1996 © Addison Wesley Longman Limited 1999 © Pearson Education Limited 2003 The rights of Roger Perman, Yue Ma, James McGilvray and Michael Common to be identified as the authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1P 0LP ISBN 0273655590 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Natural resource and environmental economics / Roger Perman [et al.].—3rd ed p cm Rev ed of: Natural resource and environmental economics / Roger Perman, Yue Ma, James McGilvray 1996 Includes bibliographical references and index ISBN 0-273-65559-0 (pbk.) Environmental economics Natural resources—Management Sustainable development I Perman, Roger, 1949– Natural resource and environmental economics HC79.E5 P446 2003 333.7—dc21 10 06 05 04 03 2002042567 Typeset in 9.75/12pt Times by 35 Printed and bound by Ashford Colour Press Ltd., Gosport Contents Preface to the Third Edition xiii Acknowledgements Notation Chapter 1.1 1.2 1.3 1.4 Chapter 2.1 2.2 2.3 2.4 2.5 Chapter xvi Introduction Part I xv xix Foundations An introduction to natural resource and environmental economics Learning objectives Introduction Three themes The emergence of resource and environmental economics Fundamental issues in the economic approach to resource and environmental issues Reader’s guide Summary Further reading 3 10 12 14 15 The origins of the sustainability problem 16 Learning objectives Introduction Economy–environment interdependence The drivers of environmental impact Poverty and inequality Limits to growth? The pursuit of sustainable development Summary Further reading Discussion questions Problems 16 16 17 28 41 44 48 52 52 54 54 Ethics, economics and the environment 56 Learning objectives Introduction 56 56 vi Contents 3.1 3.2 3.3 3.4 3.5 Chapter 4.1 4.2 4.3 4.4 4.5 Chapter Part I 5.1 5.2 5.3 5.4 Part II 5.5 5.6 5.7 Part III 5.8 5.9 5.10 5.11 5.12 5.13 Naturalist moral philosophies Libertarian moral philosophy Utilitarianism Criticisms of utilitarianism Intertemporal distribution Summary Further reading Discussion questions Problems Appendix 3.1 The Lagrange multiplier method of solving constrained optimisation problems Appendix 3.2 Social welfare maximisation 57 58 59 64 67 75 75 76 77 Concepts of sustainability 82 Learning objectives Introduction Concepts and constraints Economists on sustainability Ecologists on sustainability The institutional conception Sustainability and policy Summary Further reading Discussion questions Problems 82 82 83 86 92 96 97 103 103 104 104 Welfare economics and the environment 105 Learning objectives Introduction Efficiency and optimality Economic efficiency An efficient allocation of resources is not unique The social welfare function and optimality Compensation tests Allocation in a market economy Efficiency given ideal conditions Partial equilibrium analysis of market efficiency Market allocations are not necessarily equitable Market failure, public policy and the environment The existence of markets for environmental services Public goods Externalities The second-best problem Imperfect information Government failure Summary Further reading Discussion questions Problems Appendix 5.1 Conditions for efficiency and optimality 105 105 105 107 109 112 113 116 116 119 122 124 124 126 134 142 143 144 145 146 146 146 147 77 80 Contents Appendix 5.2 Market outcomes Appendix 5.3 Market failure 152 153 Part II Environmental pollution Chapter Pollution control: targets 165 Learning objectives Introduction Modelling pollution mechanisms Pollution flows, pollution stocks, and pollution damage The efficient level of pollution A static model of efficient flow pollution Modified efficiency targets Efficient levels of emissions of stock pollutants Pollution control where damages depend on location of the emissions Ambient pollution standards Intertemporal analysis of stock pollution Variable decay Convexity and non-convexity in damage and abatement cost functions Estimating the costs of abating pollution Choosing pollution targets on grounds other than economic efficiency Summary Further reading Discussion questions Problems Appendix 6.1 Matrix algebra Appendix 6.2 Spatially differentiated stock pollution: a numerical example 165 165 167 169 170 171 174 177 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 6.12 6.13 Chapter 7.1 7.2 7.3 7.4 7.5 7.6 177 179 181 186 187 189 193 194 195 196 196 196 201 Pollution control: instruments 202 Learning objectives Introduction Criteria for choice of pollution control instruments Cost efficiency and cost-effective pollution abatement instruments Instruments for achieving pollution abatement targets Economic incentive (quasi-market) instruments Pollution control where damages depend on location of the emissions A comparison of the relative advantages of command and control, emissions tax, emission abatement subsidy and marketable permit instruments Summary Further reading Discussion questions 202 202 203 204 206 217 228 234 238 239 240 vii viii Contents Problems Appendix 7.1 The least-cost theorem and pollution control instruments Chapter 8.1 8.2 8.3 8.4 Chapter 9.1 9.2 9.3 9.4 Chapter 10 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 241 242 Pollution policy with imperfect information 247 Learning objectives Introduction Difficulties in identifying pollution targets in the context of limited information and uncertainty Sustainability-based approaches to target setting and the precautionary principle The relative merits of pollution control instruments under conditions of uncertainty Transactions costs and environmental regulation Summary Further reading Discussion question Problems 247 247 251 261 266 267 268 268 Economy-wide modelling 269 Learning objectives Introduction Input–output analysis Environmental input–output analysis Costs and prices Computable general equilibrium models Summary Further reading Discussion questions Problems Appendix 9.1 A general framework for environmental input–output analysis Appendix 9.2 The algebra of the two-sector CGE model 269 269 270 274 278 281 290 290 290 291 International environmental problems 297 Learning objectives Introduction International environmental cooperation Game theory analysis Factors contributing to enhancing probability of international agreements or achieving a higher degree of cooperation International treaties: conclusions Acid rain pollution Stratospheric ozone depletion The greenhouse effect International trade and the environment Learning outcomes Further reading Discussion questions 297 297 298 299 248 249 291 295 311 312 312 319 321 339 342 343 345 Contents Problems Appendix 10.1 Some algebra of international treaties Part III Chapter 11 11.1 11.2 11.3 Chapter 12 12.1 12.2 12.3 12.4 12.5 12.6 Chapter 13 13.1 13.2 13.3 13.4 13.5 13.6 346 346 Project appraisal Cost–benefit analysis 351 Learning objectives Introduction Intertemporal welfare economics Project appraisal Cost–benefit analysis and the environment Summary Further reading Discussion questions Problems Appendix 11.1 Conditions for intertemporal efficiency and optimality Appendix 11.2 Markets and intertemporal allocation 351 351 352 362 373 385 386 387 387 Valuing the environment 399 Learning objectives Introduction Dimensions of value The theory of environmental valuation Environmental valuation techniques The travel cost method Contingent valuation Other techniques Summary Further reading Discussion questions Problems Appendix 12.1 Demand theory and environmental evaluation 399 399 400 403 411 411 420 435 440 440 441 441 442 Irreversibility, risk and uncertainty 444 Learning objectives Introduction Individual decision making in the face of risk Option price and option value Risk and irreversibility Environmental cost–benefit analysis revisited Decision theory: choices under uncertainty A safe minimum standard of conservation Summary Further reading Discussion questions Problems 444 444 445 448 451 457 459 461 464 465 466 466 388 395 ix References Simon, J.L and Wildavsky, A (1993) Assessing the Empirical Basis of the ‘Biodiversity Crisis’ Competitive Enterprise Foundation, Washington, DC Singer, P (1979) Not for humans only: the place of non-humans in environmental issues, in Goodpaster, K.E and Sayes, K.M (eds) Ethics and Problems of the Twenty First Century University of Notre Dame Press, Notre Dame, IN Singer, P (1993) Practical Ethics, 2nd edition Cambridge University Press, Cambridge Siniscalco, D (eds) (1993) The European Carbon Tax: An Economic Assessment Kluwer, Dordrecht Slade, M.E 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Center for Energy and Environmental Studies, Princeton University, Princeton, NJ WR (1996) World Resources 1996–97 World Resources Institute, Oxford University Press, New York Weitzman, M.L (1976) On the welfare significance of national product in a dynamic economy Quarterly Journal of Economics 90, 156–162 Willig, R.D (1976) Consumer’s surplus without apology American Economic Review 66, 589–597 WR (1998) World Resources 1998–99 World Resources Institute, Oxford University Press, New York 687 688 References WRI (2000) World Resources 2000–2001: People and Ecosystems; the Fraying Web of Life World Resources Institute, Washington, DC WWF (1993) The Right to Know: The Promise of Low-cost Public Inventories of Toxic Chemicals The World Wildlife Fund, Washington, DC Xie, J (1996) Environmental Policy Analysis: A General Equilibrium Approach Avebury, Aldershot Young, J.T (1991) Is the entropy law relevant to the economics of natural resource scarcity? Journal of Environmental Economics and Management 21(2), 169–179 Young, M.D (1990) Natural resource accounting, in Common, M.S and Dovers, S (eds) Moving toward Global Sustainability: Policies and Implications for Australia Centre for Continuing Education, Australian National University, Canberra Young, M.D (1992) Sustainable Investment and Natural Resource Use: Equity, Environmental Integrity and Economic Efficiency United Nations Scientific and Cultural Organisation, Paris Young, R.A (2001) Uncertainty and the Environment: Implications for Decision Making and Environmental Policy Edward Elgar, Cheltenham Name Index Ackerman, B.A 264 Adamowicz, W 441 Adams, D.D 344 Adelman, M.A 533 Adger, W.N 345 Anderson, D 344 Anderson, F.J 195, 495, 533, 593, 620 Anderson, K 343 Anderson, L.G 593 Anderson, R.C 222 Andreasson, I.M 235 Annan, K 51 Antweiller, W 341 Arndt, H 53 Arrow, K 39, 71, 265, 267, 386, 434, 455, 457, 459, 465 Asheim, G.B 478, 658 Axelrod, R 344 Ayres, R.U 146 Azar, C 656 Bailey, M.J 344 Baland, J 593 Barber, W.J 15, 53 Barbier, E.B 103, 345, 465, 495, 533, 594, 617, 620 Barker, T 344 Barnett, H.J 527, 531, 533 Barrett, S 299, 306, 309, 310, 311, 312, 336, 337, 338, 343, 345 Bartelmus, P 658 Bator, F.M 146 Baumol, W.J 105, 143, 146, 158, 166, 195, 239, 240, 267, 495, 533, 554 Beauchamp, T.L 75 Becker, G 53 Beckerman, W 37, 47, 103, 640 Benkovic, S 239 Bennett, J 436, 441 Benson, J 620 Bentham, J 7, 59 Berck, P 527, 528, 533, 620 Bernoulli, J 446 Bertram, I.G 238, 34 Biancardi, C 23 Bishop, R.C 240, 267, 441, 462, 465, 594 Bjorndal, T 593 Blackman, A 239 Blamey, R.K 428, 430, 432, 441 Blaug, M 15 Bockstael, N.E 409, 410, 441, 443 Bohm, P 239 Booth, D.E 379 Bose, R.K 239 Boulding, K.E 8, 9, 94, 96, 103 Bovenberg, A.L 195 Bowes, M.D 615, 620 Boxall, P.C 441 Boyer, M 239 Boyle, K.J 465 Braden, J.B 240 Brekke, K.A 658 Brennan, G 432 Bromley, D.W 195, 240, 267, 554, 569, 593 Brookshire, D.S 436–7 Broome, J 68, 386 Browder, J.O 620 Brown, G 531, 533, 560 Brown, I 238 Bruce, J.P 287 Brundtland, G.H 49 de Bruyn, S.M 53 Bryant, C 646 Buchanan, J 146, 265, 267 Burniaux, J-M 290, 344 Cairncross, F 343 Cairns, R.D 658 Calish, S 615, 620 Cameron, J 465 Carraro, C 195 Carson, R.T 423, 426 Chiang, A.C 78, 173, 197, 273, 376, 475, 476, 495, 497 Chichilnisky, G 345 Cicchetti, C.V 449, 465 Ciriacy-Wantrup, S von 103, 465, 594 Clark, C 563, 578, 586, 593, 594, 622 Clawson, M 411, 602, 620 Cline, W.R 344 Coase, R 137, 138, 139 Cobbing, P 620 Coggins, J.S 465 Cole, H.S.D 47 Common, M 17, 26, 38–40, 53, 94, 103, 239, 249, 276–80, 288, 344, 376–9, 386, 430–1, 495, 594, 634, 636, 645, 651, 653, 656 Connor, S 319 Conrad, J.M 247, 554, 578, 593, 594 Coote, A 384 Cornes, R 146, 166, 195 Costanza, R 53, 94, 103, 465 Cowan, S 239 Crandall, R 239 Cremer, H 240 Crocker, T.D 15 Cropper, M.L 195, 229 Cummings, R 441 Cunningham, S 593 Dales, J.H 239 Daly, H.E 47, 82, 94, 95, 103, 648, 649 D’Arge, R.C 53, 146 Dasgupta, P 34, 53, 146, 195, 344, 386, 476, 479, 480, 495, 533, 554, 593, 658 Deaton, A 403, 431, 442, 465, 636 DeCanio, S.J 344 Desvousges, W 465, 595 Deverajan, S 533 Diamond, P 52, 432 Dietz, F.J 146 Dinwiddy, C.L 287 Dixit, A.K 304, 465 Dorfman, R 202 Dosi, C 240 Downing, P 265, 267 Easterlin, R.A 53 Ecstein, O 594 Edmonds, J.A 344, 345 Edwards, S.F 431 Ehrenfeld, D 594 Ehrlich, A.E 53, 594 Ehrlich, P.R 53, 594 Ekins, P 656 Ellerman, D.A 239 Ellis, G.M 439 El Serafy, S 669 El-Swaify, S.A 595 Esty, D.C 342, 343 Everest, D 319 Farmer, M.C 103 Farrow, S 528 Faucheux, S 103, 465, 658 Faustmann, M 610 Feldman, S.L 344 Field, C.B 53, 658 Fisher, A.C 146, 165, 188, 195, 239, 240, 457, 465, 495, 526, 533, 593, 594 Fishkin, J.S 384 Folke, C 53 Forster, B.A 554 690 Name Index Foster, J 386 Freeman, A.M 441, 445, 448, 465 French, H 314, 344 Funtowicz, S.O 465 Georgescu-Roegen, N 23, 53, 96 Gintis, H 344 Glasser, H 75 Glasson, J 387 Goodland, R 103 Goodpaster, K.E 58, 379 Goodstein, E.S 195, 223, 229, 239, 267 Gordon, H.S 555, 588, 593 Goulder, L.H 344 Graaf, H.J de 96, 97 Graham-Tomasi, T 465 Gravelle, H 386 Graves, P.E 593 Gray, R.H 640 Greenaway, D 282 Green, C 344 Greene, W.H 415, 528 Groombridge, B 27, 29, 53, 594 Grossman, G.M 341 Grubb, M 176, 195, 238, 344, 345 Hackett, S 267 Hahn, R.W 229, 239, 344 Halkos, G 316, 317, 318 Hall, D.C 344, 533 Halvorsen, R 528 Hamilton, C 648 Hamilton, K 658 Hammack, J 429 Hanemann, W.M 429 Hanley, N 386, 415, 441 Hanneson, R 593 Hansen, J 238, 329, 344, 345 Harberger, A.C 386 Harris, C.C 431 Harris, D.P 533 Harris, M 34, 593 Harrison, G.W 432 Hartman, R 620 Hartwick, J.M 75, 82, 89, 90, 91, 98, 103, 124, 195, 239, 240, 256, 257, 267, 478, 495, 531, 593, 616, 617, 620, 633, 658, 662 Harvey, A.C 528 Hausman, J.A 441 Hawksworth, D.L 53, 594 Heal, G.M 386, 533 Heijman, W 512 Heilbronner, R.L 15 Helm, D 239 Henderson, J.V 593 Henry, C 465 Herfindahl, O.C 24 Heyes, A.G 239 Heywood, V.H 27, 465 Hicks, J.R 114, 403 Hilborn, R 594 Hirsch, F 47, 48 Hirshleifer, J 386, 636 Hoel, M 343 Hogan, W.H 479 Hohmeyer, O 345 Holling, C.S 26, 53 Hotelling, H Houghton, J.T 344 Hufschmidt, M 441 Hume, D 7, 59 Hunt, W.M 58 Huppert, D.H 594 Iudicello, S 593 Jackson, A 52 Jackson, T 648 Jacobs, M 387 Jaffe, A.B 341 Janssen, R 380, 387 Jansson, A.M 594 Jeffries, M.J 27, 53, 594 Jevons, W.S Johansson, P-O 146, 440, 620 Johnson, R.W 595 Jorgensen, D.W 239, 344, 531, 533 Joskow, P 264, 265, 267 Just, R.E 146 Kahneman, D 432 Kaldor, N 113, 114 Kamien, M.I 495 Kant, I 57, 59, 64 Kemp, D.D 319, 344 Kemp, M.A 432 Keynes, J.M 7, 44 Klassen, G.A.J 103 Kling, C.L 441 Kneese, A.V 23, 75, 240, 267, 440, 441, 595 Knetsch, J 429 Knight, F.H 445 Kohn, J 103 Kolstad, C.D 195, 239, 345, 495 Kosmo, M 238 Kramer, R.A 617 Krebs, C.J 53, 594 Kreps, D.M 146, 403, 442, 447, 465 Kristrom, B 426, 441 Krupnick, A.J 232, 233, 239 Krutilla, J.V 386, 465, 594 Kuznets, S 37 Kwerel, E 260 Laffont, J-J 195, 239, 240 Lancaster, K 436 Lande, R 594 Laplante, B 239 Lashof, D 344 Layard, P.R.G 146, 386 Lecomber, R 47 Lee, N 387 Lele, S.M 103 Leontief, W 272, 533 Leopold, A 57 Lind, R 386 Locke, J 58, 87 Lomborg, B 29, 52 Lovelock, J 594 Lovins, L.H 53 Ludwig, D 53, 103, 593, 594 Lutz, E 658 Maass, A 594 MacArthur, R 594 MacGillivray, A 629, 630 McCormick, J 54 McInerney, J 146 McNeely, J.A 594 McNicoll, I.H 274, 275 Maddison, A 32 Magat, W.A 215 Mäler, K-G 146, 343, 443 Malthus, T 4–7 Manne, A.S 338, 344, 479 Marglin, S 386 Marin, A 441 Markandya, A 103, 229 Marshall, A 6, Marx, K Maxwell, J 265, 267 May, R.M 27, 29, 594 Meadows, D.H 44, 45, 46, 269 Mendelsohn, R 344 Menger, K Mikesell, R 386 Mill, J.S 4–6, 59 Miller, M.H 528 Miller, R.E 290 Milliman, M 266, 267 Millock, K.D 240 Mintzer, I.M 344 Mitchell, R 430, 441, 594 Montero, J-P 239 Montgomery, C.A 620 Montgomery, D.W 239, 345 Munda, G 387 Munro, G 563 Naess, A 379 Neher, P.A 593 Nelson, J.P 441 Neumayer, E 103, 658 Nicoletti, G 290 Nordhaus, W.D 47, 325, 329, 333, 337, 338, 344, 495, 531, 533, 544 – Norgaard, R.B 533, 594 Norton, B.G 379 Nozick, R 58 Olson, M 265, 267 Opschoor, J.B 229, 239, 345 Ostrom, E 593 Page, T 47, 87 Palmquist, R.B 441 Panayotou, T 37, 38, 39 Pareto, V 7, 61, 107, 111, 113 Park, C 52 Parry, I.W.H 240 Name Index Pearce, D.W 103, 239, 240, 345, 362–3, 386, 440, 594, 620, 650, 651, 652, 655 Pearse, P.H 620 Peltzman, S 195, 265, 267 Penz, C.P 75, 378 Perlman, M 16 Perrings, S.C 26, 53, 94, 465, 594 Peterson, E.M 593 Peterson, G.L 431, 434 Petsonk, A 345 Pezzey J.C.V 83, 85, 86, 87, 103, 478, 554, 637, 658, 660 Pigou, A.C 8, 68, 166 Pindyck, R.S 528, 533 Plott, C.R 432 Plourde, C.G 537, 554 Plummer, M.L 465 Ponting, C 52 Porter, M 176, 195, 594 Porter, R.C 378, 386 Portes, R 240 Portney, P.R 239, 315 Prell, M.A 533 Price, C 386 Proops, J.L.R 290, 652, 653, 654 Proost, S 146 Quinn, E.A 319 Randall, A 240, 267, 417, 420, 429, 440, 441, 583, 584, 594 Rao, P.K 344 Rasmusen, E 344 Rawls, J 64, 65, 74, 75 Ready, R.C 449, 451, 465 Reaka-Kudla, M.L 53 Redclift, M 103 Regan, T 379 Reilly, J.M 344 Renner, A 146 Rennings, K 656 Repetto, R 53, 594, 620, 626, 646, 647, 648 Rettig, R.B 573, 593 Ricardo, D 4–6 Rojstaczer, S 655 Romstad, E 240 Rose-Ackerman, S 195, 554 Runge, C.F 343 Russell, C.S 240 Swallow, S.K 615, 620 Swanson, T.M 128, 129, 130, 594 Sagar, A.D 656 Sagoff, M 379, 383, 430, 432, 435 Salop, S 267 Salvanes, K.G 593 Sandler, T 297, 299, 303, 316, 336, 620 Sanjour, W 265, 267 Sarokin, D 101 Schaefer, M.D 558, 563 Schaeffer, D.J 94, 102, 656 Schkade, D.A 432 Schmalensee, R 344 Schmidheiny, S 100 Schneider, S.H 344 Schulze, W.D 441 Scitovsky, T 75, 114 Segerson, K 240 Sen, A 67, 68, 75, 379 Sethi, R 594 Shackle, G 465 Shafik, N 37 Shogren, J.F 465 Shone, R 624 Simon, J.L 16, 53, 594 Singer, P 57, 59, 75, 379 Slade, M.E 528, 533 Smart, B 100 Smith, A 4, 5, 6, Smith, F.D.M 29 Smith, S 239 Smith, V.K 420, 426, 432, 440, 441, 533 Smith, V.L 195, 554 Soderbaum, P 103 Solow, R 83, 87, 89, 91, 103, 434, 476, 631, 632, 633, 634, 637, 638, 658, 663 Spash, C.L 431 Stavins, R.N 344 Stebbing, A.R.D 267 Stern, D.I 38, 39 Stevens, T.H 431, 432 Stigler, G 195, 265, 267 Stiglitz, J 370, 373, 386, 477 Stirling, A 387 Stockhammer, E 648 Stollery, K.R 528 Sutinen, J 593 Tahvonen, O 554, 593, 620 Tietenberg, T.H 195, 223, 229, 234, 235, 239, 344, 345, 593 Tinbergen, J 47 Tobey, J.A 341 Todaro, M.P 34 Toman, M 103, 344, 658 Turner, R.K 440 Ulph, A 195 Usher, D 640 Van den Bergh, J.C 103 Van Houtven, G 214 Van Kooten, G.C 593 Van Pelt, M.J.F 387 Varian, H.R 146, 343, 385, 386, 511 Vatn, A 240, 379 Vaze, P 290, 646 Victor, D.G 344 Vincent, J.R 615, 620 Viscusi, W.K 215 Vitousek, P.M 28, 29, 53, 655, 658 Wackernagel, M 655, 658 Walras, L Walters, A 386 Warnock, G.J 58 Watson, R.A 57, 58 Weimer, D.L 239, 267 Weisbrod, B.A 448, 449, 455, 465 Weitzman, M.L 658, 662 Weizsacker, E.U von 53, 238 Weyant, J.P 333, 345 Whalley, J 287, 344 White, K.S 344 Wilen, J.E 593 Willig, R.D 407, 409, 429 Willis, K 413, 441 Wilson, E.O 27, 29, 53, 594 Winpenny 440 Xie, J 290 Young, M.D 465, 647, 648 691 Subject Index Abatement costs, 254–5 Absorptive capacity (see assimilative capacity) Accounting, environmental, 90, 91, 101, 102 capital depreciation, 641 capital stock, 632, 634 constant consumption paths, 633 consumption, income and wealth, 634, 636 defensive expenditure, 642, 643 depletion/depreciation of natural resources, measures, 641–6 change in net present value, 644, 645 example: Australia, 645, 646 example: Indonesia, 646–8 example: U.K., 646 net price, 644, 645 user cost (El Serafy), 644, 645, 669–70 environmental cost, 642 environmental degradation/deterioration, 640, 641, 647 environmentally adjusted income: Australia, 647–8 environmentally adjusted income: Indonesia, 647 environmentally adjusted domestic product, 638 feasibility (of constant consumption), 637 firm level, 640 interest on wealth, 634 interest rate, 635 measures: gross domestic product, 640, 641 net domestic product, 641 net national product, 632 national, 631 national income measurement, 638 net investment, 634 prices (theoretically correct), 632, 633, 637 renewable resources, 639 theory, 631–40 and sustainability, 631, 648 uncertainty, 640 Accounting for the environment in practice, 640 satellite accounts, 642 UNSTAT proposals, 642–3, 666–9 Acid rain, 312–18 causes, 313–14 consequences, 314 control, 266, 314–16 benefits of control, 315 international control, 315–18 national control, 314–15 game theory analysis of, 315–18 gains from cooperation, 316–18 precursors, 312 principal polluters, 314 Affluence, 32 Agenda 21 (see Rio) Aggregation, 392–4 Agricultural chemicals, 549 Air pollution (see pollution) Aldicarb, 554 Allocation of resources (see resources and efficiency) Altruism, 402 Ambient pollution standards (see pollution, targets) Amenities, environmental, 19, 478 Amenity services, 8, 401 Ancillary benefits, 176 Annuity, 550, 589 Asset efficiency (asset equilibrium condition), 576, 579 Assimilative capacity (see carrying capacity) Averting behaviour, 188 Averting expenditure (valuation approach), 440 Backstop technology, 477, 479, 490 Benefit: environmental, 402–3 gross, 120 marginal, 120 net, 120 net benefit maximisation, 120 preservation, 449 Benefit-cost ratio, 370 Bequest motive, 403 Berlin summit, 334 Bernoulli paradox (see St Petersburg paradox) Best available technology, 213 not entailing excessive cost (BATNEEC), 213, 214 Best practicable technology, 213 Bias, sources in valuation (see contingent valuation) Biodiversity, 26 causes of decline, 29 extent of decline, 27, 29 loss, 655 species extinction, 462 Bioeconomic equilibrium, 562, 564 Biological diversity (see biodiversity) Biological growth (see growth) Biological oxygen demand (BOD), 229, 540 Bliss point, 553 Bonds (loanable funds) market, 357–8 Brundtland Report (see World Commission on Environment and Development) Call options, 465 Canada, 591, 615, 628, 629 Capital: human, 90 intellectual, 90 natural, 21, 90 reproducible (physical), 12, 90 Capital theory, 640 Carbon cycle, 545 Carbon pools (reservoirs, sinks), 545 Carbon taxation, 190, 222, 272, 279, 280, 288–9, 547 Carrying capacity, 97, 169, 544, 557, 558 Catch coefficient, 563 Categorical imperative, Kant, 57 Certainty equivalent (see risk) CFC emissions (see acid rain, causes) CGE (computable general equilibrium) models, 191, 281–9 assumptions of, 281–2 benefits and costs of, 289 CGE models: simulation examples: alternative uses of carbon tax revenues, 288–9 CGE analysis of GHG abatement costs, 287–8 illustrative model and simulation, 281–90 China and CFCs, 321 China, flora and fauna, 616 Choice modelling, 436 Chlorofluorocarbons, 319–20 Choke price (see price) Citizens’ juries, 384 Classical economics, Clean Air Act (USA), 211, 214, 229, 234, 264–6, 314, 315 Subject Index Clean Development Mechanism (see Kyoto) Clean-up expenditure, 185, 540 Climate change (see global climate change) Closed economy, 636, 637, 638 Coase theorem, 137–9 Cobb-Douglas production function (see production function) Cod, 110 COMECON, 316 Command-and-control instruments (see policy instruments) Common property (see property rights) Comparative statics analysis, 573–4 Compensating surplus (see valuation) Compensating variation (see valuation) Compensation (in logistic growth), 558 Compensation tests, 113 intertemporal, 369 Kaldor, 113 Kaldor-Hicks (potential), 114 Kaldor-Hicks-Scitovsky, 114, 134 Computable general equilibrium models (see CGE models) Congestible resources, 127 Conservation of mass and energy (see thermodynamics) Consideration, principle of, 58 Constant elasticity of substitution (CES) function (see production function) Constrained optimisation (see also dynamic optimisation), 107, 482 Consumer sovereignty, 60 Consumer surplus (see valuation) Consumption discount rate, 354 Consumption growth rate, 485–6, 504 Consumption transformation frontier, 354 Contingent valuation (see also valuation), 410, 420–9 advantages of, 420 citizen responses, 430 examples of contingent valuation: Coronation Hill mining, Australia, 426 Exxon Valdez oil spill, 421–3 South-East Forest, Australia, 428 focus groups, 424 NOAA panel, 434, 435 potential biases, 424 pre-testing, 424 price and scope sensitivity, 427 protest responses, 425, 431 purchase of moral satisfaction (see also warm glow), 432 relevant population, 425, 430 responsibility considerations, 431–2 sensitivity analysis, 426 survey instrument design, 421, 424 dichotomous choice, 421, 424 validity: construct, 433 content, 433 criterion, 433–4 valuation function, 423, 425 warm glow considerations, 431 and WTP/WTA, 423, 425, 429, 434 WTP/WTA discrepancies, 427, 432, 433 Convention on Biological Diversity: Rio 1992, 50 Convexity (and non-convexity) of benefit and damage functions, 187, 248 and efficiency, 188 Cooperation, international environmental, 297–9 Costate variables (see shadow prices) Cost-benefit analysis (see also project appraisal), 368–98, 549 alternatives to, 380–4 choice of discount rate, 369–71 consumption-based appraisal, 368–9 and distribution, 369 environmental, 373–82, 401–2, 457–9 objections to environmental CBA, 378 of forestry, 362–3 intertemporal welfare economics foundation (see welfare economics) and non-market evaluation (see valuation) in practice, 362, 363, 369, 370, 371 of risk-bearing (see risk) utility-based appraisal, 368 Cost effectiveness analysis, 382 Cost minimisation, 117, 118 Costs, private, external and social costs: capital costs, 563 carrying (holding) costs, 575 environmental costs, 401 exploration, 531 extraction, 486–9, 505–6, 530 and size of remaining stock, 487, 488, 577, 578 marginal cost of resource extraction, 644 marginal costs, 530 opportunity costs, 575, 607 pollution abatement costs, 189–93, 248–9, 253–6 Critical depensation, 559 Crowding out, 372 Damage, environmental (see pollution damage) Damage costs, 541, 542 Damage, uncertainty about pollution damage, 255–7 DDT, 170 Decay of pollutants, 544, 545 variable decay, 544 Decision theory (see game theory and uncertainty) Decisiveness discounting, 432 Deep ecology, 57 Defensive expenditure, 540 Deliberative polling, 383 Demand, resource (see resources) Demographic transition, theory of, 34 Density dependent growth (see growth) Depensation, 559 Depletability (see public goods, properties) Depletion (see resource exhaustion) DICE model, 546 Difference principle (see Rawls) Dioxins, 170 Discounting, 184, 185 arithmetic of, 69 exponential, 368 and utilitarianism, 68, 69 Discount rate, 607 adjustment, 377–8 choice of rate, 70, 369–73 consumption, 70, 184, 354, 394–5 social and private, 485, 526, 582 utility, 70, 359–60, 394–5, 485, 540 Disease (see health) Divisibility (see public goods, properties) Dose-response relationships, 26, 439 Double dividend, 172, 175, 176, 190, 237, 261, 333 Dynamic optimisation, 186, 480–2, 512–15, 538, 549 Earth summit, Rio, Brazil, 334 Ecological economics, Ecological footprint, 655 Ecology, ecosystems, 25 interdependence, resilience, stability, 26 Economic growth (see growth) Economic profit, 563 Economic rent, 564 Economy-environment interactions/interdependence, 17, 640 Edgeworth box, 107 Efficiency, 3, 4, 105 in competitive markets, 116, 124, 152–3, 356, 517–18 conditions for allocative efficiency, 3, 4, 109, 116, 124, 147–52 in consumption, 107, 108 defensive expenditure, 543–4 dynamic, intergenerational, intertemporal, 236, 540, 541 discount rate equality over time, 353–4 equality of discount rate with rate of return, 355–6 intertemporal efficiency conditions, 352–6, 388–95, 484–5 rate of return equality over time, 354–5 economic, 107–9 and equity, 124 and Hotelling principle, 540 loss, 253–6 marginal conditions for, 183, 549 non-uniqueness, 109, 110 partial equilibrium analysis, 119, 120 policy implications, 542 of pollution targets, 165–88, 248 in production, 108, 110 product-mix, 108, 109 static efficiency conditions, 484 693 694 Subject Index Effluent charges (see pollution taxes) Effluent standards (see pollution standards) Effort (in fishing), 563 Elasticity of marginal utility, 71, 362, 485 El Nino, 570 Emission coefficients, 274 Emissions, external costs of (see pollution damage and externalities) Emissions taxes (see policy instruments) Engineering models, 189, 190 Entropy, 22 Environmental: accounting (see accounting) cost benefit analysis (see cost benefit analysis) damage (see damage) degradation, 36 Environmental Kuznets Curve, 36–40 impact analysis, 380 impacts (see also damage), 39 indicators (see indicators) input-output modelling (see input-output modelling) pressures, 539 resources (see resources) services, 20 standards (see pollution standards) Environmental cost-benefit analysis (see cost-benefit analysis) Environmental indicators (see also sustainability, indicators), 627–31 Environmental performance bonds, 463, 465 Equitable (see fairness) Equity (see fairness) Equivalent surplus (see valuation, and welfare economics) Equivalent variation (see valuation, and welfare economics) ETA (macro) model, 158, 479 Ethics: libertarian, 58, 59 utilitarianism, 59–62 European Union, 299 Evaluation (see valuation) Excludability (see public goods, properties) Existence value (see value) Expectations, 526, 528 Exponential (harvesting) model, 563 Expressive benefits, 432 Externalities, 134–42, 529, 580 classification, 134 and Coase theorem, 156–7 crowding, 581, 589 and efficiency, 135–42 forms of: consumption-consumption, 137–9, 154–7 production-consumption, 140–2, 159–61 production-production, 139–40, 157–9 and pollution, 166 and second-best problem, 142–3 stock externalities, 569, 582 taxation for externality correction, 141 Extinction of species, 584–6 Extraction: costs (see costs) of non-renewable resources, 473–86, 490 Fertility, economic theory of (see population) Final conditions, 486 Fish: catches, harvests, 562–3, 565 Pacific halibut, 588 Fisheries: entry and exit, 563–4 landing tax, 588 monopolistic, 582 ocean fisheries and efficiency, 569–70 open access, 561–70 open access dynamics, 566, 570 open access steady state, 564–6 overfishing, 569–70 policy/regulation, 585–91 present value maximising model, 574–9 private property, 570–9 user cost, 589 Fishing fleet, 587 Forest resources: biological growth, 602–5 characteristics of, 601–5 comparative static analysis, 610–12 change in interest rate, 611 change in net price of timber, 611–12 change in planting costs, 611 current state of, 599–601 dominant use forestry, 615 Faustmann rule, 610, 612 geographical distribution, 601 multiple use/service, 601, 612–15 private and social optima compared, 615 natural/primary forests, 601 natural forest deforestation, 615–18 non-timber benefits, 617 outputs, 400 plantation forests, 601 plantation harvesting/optimal felling models, 605–15 infinite rotation models, 608–12 single rotation models, 605–8 present value maximisation, 605–15 property rights, 618 public ownership and regulation, 619 fiscal policy, 619 site value, 610, 612, 614 sustainable yields, 605 tropical deforestation, 616–17 population pressure, 616 Forward markets, 526 Fossil fuels, 276, 538, 548 Framework Convention on Climate Change, 51, 334, 547 Bonn, 336 Marrakech, 336 Free rider problem, externalities and public goods, 131, 132, 569–70 Fuelwood, 601 Futures markets, 356–7, 395–6 Game theory (see also pollution control, international), 299–312 cooperative, 302–5, 308–9 Antarctic Treaty, 311 binding agreements, 302 Biodiversity Convention, 310 factors promoting cooperation, 300, 311–12 commitment, 311 linkages and reciprocity, 311 repetition, 311 transfers and side-payments, 311 free riding, 310 and global climate change, 336 incentives to defect, 310 number of signatories to agreement, 310 partial cooperation (incomplete agreements), 309–11 self-enforcing agreements, 302–3, 309–11 stability, 302, 306 multiple players, 305–7 Nash equilibrium, 301, 310, 316 non-cooperative behaviour, 301–2, 308 assurance game, 305 chicken game, 303–4, 306 extensive form, 303–4 payoffs, payoff matrix, 300, 308 payoff generating function, 306 prisoners dilemma, 132, 300–3, 306 repeated games, 311–12 strategic interdependence, 301 strategies/decision rules: dominant, 301 two-player binary choice games, 300–5 General equilibrium analysis/theory, Genetic diversity (see biodiversity) Geneva Protocol, 315 Genuine Progress Indicator (GPI), 648 Global climate change, 545 abatement costs, 331–4 carbon leakage, 333 no regrets opportunities, 333 technical progress, 333 and CFC emissions, 321 climate change models, 325–6 RICE model, 325, 545, 546 costs of, damages from, 326–30 global circulation models, 326 greenhouse gases: emissions and concentrations, 169, 176, 321–6, 548 impacts, 326–8 Subject Index Global climate change (continued) lifetime, 545 relationship between emissions and concentrations, 321–6, 545 Intergovernmental Panel on Climate Change (IPCC), 322–6 Special Report on Emissions Scenarios, 322–3 international cooperation, 337–9 gains from flexibility, 337 role of carbon sinks or pools, 329–30 Global warming (see global climate change) Government failure, 144–5 Grandfathering (of permits), 232 Greenhouse effect (see global climate change) Greenhouse gases, 540 Gross Domestic Product, 30, 32, 43, 640 Gross National Product, 640 Growth: biological, 557–60 Gompertz growth function, 558 logistic growth, 558–60 density dependent, 557 economic, 44 intrinsic (biological) growth rate, 557, 558 limits to, 44, 45 stochastic, 560 Hamiltonian (see Maximum Principle) Hartwick (saving) rule (see also sustainability), 89, 100, 478, 632, 633, 634, 637, 660–3 Health (human), 168, 174 Heckscher-Ohlin-Samuelson model, 341 Hedonic pricing (see also valuation), 435–6 of Los Angeles air quality improvements, 436–7 Helsinki Protocol (1985), 315 Herring, 110 Hicksian measures of utility change (see also valuation), 404 Holding cost, 575 Hotelling rent, 643, 662, 664 Hotelling rule, efficiency condition, 485–9, 512, 515, 517, 527, 610, 612, 632, 633, 661 Household production function, 416 Human appropriation of net primary production, 655 Human appropriation of the products of photosynthesis, 655 Human development, state of, 41–4 Humanist moral philosophy, 57 Hysteresis, 544 Impact assessment, 380 Imperfect information, imperfect knowledge, 247–67 Imperfections, markets (see market failure) Implicit prices (see shadow prices) Incentive-compatible instruments, 257–61 Incentives, 99, 249, 258–61, 463 Index of Sustainable Economic Welfare (ISEW), 648–50 ISEW: USA, 649 Indicators, environmental, 648–56 physical indicators of resource scarcity, 530 Individual Transferable Quota (ITQ) system, 572, 590 Inequality (see poverty) Information, 100, 248–9 imperfect information (see also uncertainty), 383, 402, 444 and role of government, 101 Initial conditions, 486 Innovation incentives, 266 Innovation mechanisms, 479 Input-output modelling, 191, 269, 272–4, 652 accounting, 270–2 cost and price effects, 278–81 dual of I/O model, 278 environmental I/O analysis, 274–81 general framework, 291–5 the Leontief inverse, 272, 279 transactions table, 270–1 Institutional capture, 570 Instruments of policy (see policy instruments) Internal rate of return, 366–7 Interest rate (see also discount rate), 520 International environmental problems, 297–346 International trade (see trade and the environment) IPAT identity, 29–34 Irreversibility (see also risk and uncertainty), 102, 103, 444, 467–9, 544, 544 and allocative efficiency, 467–9 costs of, 467 with the future known, 467–8 with imperfect knowledge, 468–9 Isocline, 552 Isoquants (see production function) Joint Implementation (see Kyoto) Just acquisition, principle of, 58 Krutilla-Fisher model, 375–7, 453, 457 Kyoto conference, Convention and Protocol (1997), 176, 191, 229, 334–9, 547 Cost of meeting Protocol targets, 192–3, 333–4 flexible mechanisms, 325 Banking, 335 Clean Development Mechanism (see Kyoto) emissions trading, 335 Joint Implementation, 335 Lagrange multiplier technique (see also dynamic optimisation), 62, 77–80, 149, 511 Landfill tax, 223 Large Combustion Plant Directive, 315 Lexicographic preferences, 430, 431 Libertarian moral philosophy (see ethics) Life expectancy, 42 Limits to growth (see growth) Loads (on environmental media), 26 Loanable funds (bonds) market, 357–9, 396–8 Logistic growth function (see growth) London Protocol (1990), 320 Long Range Transboundary Air Pollution Convention, 315, 316 Lump sum taxes and transfers, 123, 124 Marginal damage (see damage) Marginal rate of return on investment, 71 Marginal rate of technical substitution, 108, 109 Marginal rate of transformation, 109 Marginal rate of utility substitution, 107, 109 Marginal theory, Marginal utility (see utility) Marketable emissions permits (see policy instruments) Market failure, 7, 124–45, 153–61 externalities, 7, ozone, 136 and public policy, 124 Markets: competitive (see competitive markets), 152 and efficiency, 152–3 and optimality, 395–8 Materials balance principle and models, 23, 166 Matrix algebra, summary, 196–200 Maximum Principle (see also dynamic optimisation), 487, 491, 496–505, 540 co-state variables, 499 current value Hamiltonian, 497, 501, 502, 540, 549, 580, 635 and discounting, 500 Hamiltonian, 497 Lagrange multipliers, 499 Most Rapid Approach Path, 579 objective function, 497 solution, 497, 500, 503 steady state solution, 549 terminal conditions, 498 transversality conditions, 498, 499 Maximum sustainable yield, 92, 489, 560, 572, 578 Modified efficiency targets, 174 Monopoly: compared with competition, 518–20 and economic efficiency, 518 Monte Carlo analysis, experiments, 417, 419 695 696 Subject Index Montreal Protocol, 320 Mortality, human (see health, human) Most Rapid Approach path (see maximum principle) Multi-criteria analysis, 380, 382 Multinomial logit model, 438 NAAQS, 194 National income, 638, 660–6 adjusting national income to account for the environment, 663–6 National income accounting, 271–2 Natural capital (see capital) Naturalist moral philosophies, 57, 58 Net benefit (see benefit) Net domestic Product, 638 Net National Product (national income), 632 Net present value, NPV (see also present value), 364–6 Net price (see royalty) Net primary production, 655 New England fisheries, 569, 570 New Zealand, fishing regulations, 591 Nitrates, 549 Non-convexity (see convexity) Non-essentialness, 410 Non-linearities, 250 Non-renewable resources (see resources) No regrets policies (see double dividend) Normative economics (see welfare economics) Nuclear energy, 480 Ocean fisheries, 110 OECD environmental indicators, 628 Oil-to-electricity fuel cycle, 167, 168 Open access fisheries (see fisheries) Open access resources (see also property rights), 561 Open economy, 636, 637 Opportunity cost (see costs) Optimal control problem (see dynamic optimisation, and Maximum Principle) Optimal growth models, 71, 88, 359–62, 474 optimal growth with non-renewable resources, 73, 480, 538 steady state solutions, 544–7 Optimal renewable resource harvesting, 574–7 Optimal resource allocation, 4, 150–2, 480–6 comparative statics and dynamics, 520–6 in competitive markets, 517–18 intertemporal optimality, 356, 392–5, 480–6 in monopolistic markets, 518 optimality compared with efficiency, Optimal resource extraction (optimal depletion), 474, 480–6, 503–5 cake eating model, 71, 72 Optimal compared with sustainable consumption paths, 637 Optimisation (models) with renewable resources, 489, 490, 504–5, 566–70, 574–9 Optimum (see welfare maximisation) Option price (see risk) Option value (see risk and also value) Oscillatory cycles, 566, 567 Oslo Protocol, 315 Ozone, 222, 319–21 depletion in upper atmosphere (stratosphere), 136, 319–20 control policy, 222, 320–1 costs and benefits of CFC control, 319–20 hole in Ozone layer over Antarctica, 319 human impacts, 319 role of leadership, 321 Pareto efficiency/optimality, improvements (see also efficiency), 7, 61, 107, 111, 547 Partial equilibrium analysis/theory, Pay-off matrix (see game theory and decision theory) PCBs (polychlorinated biphenyls), 170 Perfect competition (see competitive markets) Peru, anchovy fishery (see also anchovy), 110, 569, 570 Phase-plane diagram, 552, 567, 568, 579 Political economy of regulation (see regulation) Pollutants: lead, 170 nitrogen dioxide, 233 nitrogen oxide, 315 sulphur dioxide, 264–6, 312–13 toxic, 204, 212 Pollution: air, 210, 211, 222, 235 ambient level of, 178, 233 Australia, 277 classification of, 169–70 damage, 169–70, 248, 538 flow damage, 169–70 stock damage, 170 damage via: production function, 538 utility function, 538 decay and persistence, 177, 181, 182, 186, 187 efficient level of, 170–4, 217 as an externality, 171 flows, stocks, 169, 170, 177 hazardous waste, 212 international, 297–346 irreversibility, 186 mixing, 178 not uniformly mixing, 209, 230–2, 252 uniformly mixing, 178, 209, 230 mobile source, 211 persistence, 550, 551 shadow price, 184 of pollution emissions, 184 of pollution stock spatial aspects of, 177–81, 228–33 stock-damage pollution, 538 stock-flow relationship, 551 targets, efficient/optimal, 165–95 thresholds, 186, 256–8 water, 212, 222, 262 Pollution abatement costs and benefits, 171, 172, 248–9, 253 Nitrogen dioxide, 229, 233 in OECD, 221 precautionary principle, 249–51 Pollution control instruments bargaining, 206, 208 limitations to bargaining, 206, 208 command-and-control (CAC), 209–16 quantitative controls, 213, 230 technology standards, 213–14, 252, 253 in the United States, 210–12 criteria for choice of instrument, 203–4 cost-effectiveness, 204–5, 219, 226, 234, 253 conditions for least-cost control, 234 dependability, 251–2 distributional effects/equity, 227, 236, 237 efficiency under uncertainty, 248, 251 enforceability, 234 flexibility, 252–3 information requirements, 234, 248–9 long-run effects, 236–7 the least-cost theorem, 205, 231, 242–6 legal liability for damage, 208, 209 location, 216, 228–33 market instruments in practice, 222–3, 234–5 market or incentive based instruments, 217, 231, 232, 251 combined price and quantity controls, 257 incentive-compatible instruments, 257–61 marketable permits and quotas, 173, 219–28, 251 bubble policy, 228 Emission Reduction Credit system (USA), 228 emissions banking, 228 initial allocation, 224–7 offset policy, 228 in practice, 229 in USA, 223, 229, 233 subsidies on emissions abatement, 217, 220, 231 long run effects of taxes and subsidies, 220 taxes on emissions, 217, 220, 231, 251–2, 542 Subject Index Pollution control instruments (continued) optimal, three part, pollution taxes, 542 spatial differentiation of control, 228–33 ambient standard systems, 230–3 Pollution, economic models: dynamic or intertemporal models, 181–6, 538–53 efficient and optimal pollution, 170–94 difficulties in identification of, 248 partial models: net benefit maximisation, 172, 549 spatial models, 177–81, 201, 228–33 static models, 171–4 steady-state models, 183, 184 Pollution, international pollution control, 298–347 cooperative behaviour, 298–9 Pollution spillovers, 300 Population (biological): collapse, 584–6 minimum sustainable population, 585 Population (human), 30, 31 control, contraception, 35 dynamics, 35 environment, effects on, 16 fertility, total fertility rate, 31 growth, 30, 31 microeconomic theory of, 35 replacement rates, 31 stability, 249 Poverty and underdevelopment, 41–4 Precautionary principle, 249–51, 463, 465, 545 Preference revelation (see free rider problem) Preferences, 383 Present value maximisation, 358, 574–9 Preservation, benefits and costs (see Krutilla-Fisher model) Price: choke, 412, 515, 516 endogenous, 637 environmental services, 453 gross, 488, 523, 543 market, 121, 515 net (royalty), 488, 515, 516, 523, 531, 543, 564 shadow (see shadow price) socially optimal, 543 in units of utility, 482, 483 Principal-agent theory, 265 Principle of insufficient reason, 461 Prisoners Dilemma (see game theory) Producer surplus, 122 Production function, 25, 88, 106, 474, 539, 547 Cobb-Douglas, 89, 474, 494 constant elasticity of substitution (CES), 474, 476 elasticity of substitution, 475, 476 isoquants, 475 Leontief, 476 perfect substitution, 475 Schaefer form of fishery production function, 582 specification in relation to laws of nature, 25 Production possibilities, 476 Profit maximisation, 152 Project appraisal (see also cost-benefit analysis) 362–7, 465 private project appraisal, 364–7 public appraisal (see cost-benefit analysis) and sustainability (see cost-benefit analysis) Property rights, 10, 124, 429, 570, 589–90 appropriability of returns from, 129 and biodiversity, 128 and Coase theorem, 138–9 in fisheries, 590 open access, 127, 561 private, 10, 100 Public goods, 126–34, 153–4 and efficiency, 127 efficient level of provision, 127, 128, 153 examples, 126 global, 299 and markets, 131, 153 properties of a pure public good, 126, 401 non-excludability, 401, 570 non-rivalry, 401 Quasi-option value (see value) Radical uncertainty (see uncertainty) Radioactive substances, 549 Rawls, and justice, 64 difference principle, 65 Receptors, 178, 232 Reciprocity, 58 Recreation, 401 Recycling, 20, 23 Regulation, political economy of, and regulatory failure, 263–6 Rent (see net price) Reserves (see resources) Residence time (life) of pollutants, 177 Residuals (see wastes) Resilience (of ecosystems), 93, 102, 249 Resources: allocation and economic efficiency (see also efficiency), 56, 116, 510 base, 508 common-property (see property rights) demand functions, 510, 513, 515 discovery, 489 environmental, 56, 478 essentialness, 474–5 exhaustion costs, 522–3 exploration, 479, 489 finite, 508 heterogeneous, 479, 490, 524 homogeneous, 524 natural and environmental, 5, optimal use of, 510–14 new discoveries, 522, 529 non-renewable, 11, 18, 510 optimal extraction path, 516–17 potential, 508, 509 renewable, 11 policy instruments for renewable resource policy, 587–91 renewable resource policy, 586–91 scarcity, 476, 530 absolute, 95 indicators, 530 socially efficient resource harvesting, 580–2 stock-flow relationship, 539 stock/reserves, 11, 18, 508, 509, 521 possible, 508 potential, 509 probable, 508 proven, 508, 509 substitutes, 476, 478 taxes and subsidies, 525–6 Reversibility and irreversibility (see irreversibility) Revolving door careers, 265 RICE model, 544, 545–8 Rio Declaration, 463 Rio de Janeiro, United Nations Conference, UNCED (1992) Risk (see also uncertainty): availability, 448 classic risk, 445 compensating surplus, 448, 449 concepts for analysis of risk: certainty equivalence, 446, 447 cost of risk bearing (CORB), 446, 447, 458 expected utility, 446, 465 expected value/expected NPV, 367, 446 individual decision making under risk, 445 probability: objective and subjective, 445, 446 risk neutrality/aversion/preference, 367, 446, 447 dealing with risk in project appraisal, 367 ex ante and ex post measurement, 449, 451 and irreversibility, 451–4 option price, 448, 449, 450, 465 option value, 448, 465 probabilities: objective, subjective, 445, 446 quasi-option value, 455–7, 465 St Petersburg paradox, 446 Rivalry, 401 Royalty (see also net price), 512 Russia, 615, 616 697 698 Subject Index Safe Minimum Standard of conservation (SMS), 250–1, 379, 461–3 a modified safe minimum standard, 250, 462 and pollution policy, 250–1 and renewable resources, 463, 582–4 Satellite accounts, 642 Scarcity (see resource scarcity) Schooling fisheries, 563 Sensitivity analysis, 367, 420 Sentience, 58 Services of environmental resources, 18, 400 Shadow price, 482, 540, 580 of capital, 540 of emissions, 549 of environmental resource stocks, 540, 541, 575 of pollution, 540 Site value, 610 Social choice, 379 Social discount rate, 485 Social limits to growth, 47, 48 Social welfare, 65 Social welfare function (see welfare function) Sofia Protocol, 315 Sources (of emissions), 178, 179 Sovereignty, 299 Spaceship earth, 9, 94 Species extinction (see biodiversity) Stable arm, 552 Standards (see pollution, targets) Stated preference valuation methods, 420 Steady state harvests, 94–6, 489, 560–1 Steady state stock level, 544 Stochastic growth, 560, 585 Stock pollutants, 177 Stock pollution model, 549 St Petersburg paradox (see risk) Substitution effect (of a price change), 405 Substitution of resources, 12, 20, 280, 475 magnitude of, 478 Substitutability and technical progress, 477 Sunk costs, 563 Survivability and survivable development, 83, 477 Sustainability, growth, sustainable development, 4, 17, 48, 74, 249–51, 476 building a capacity and consensus for, 97 conditions for, 633 constraints, 83, 84, 250, 379 consumption path, 637 definitions and meanings, 83, 85, 86 ecology and ecosystems, 86, 91 and efficiency, 250 feasibility, 87 genuine saving, 650 and Hartwick Rule, 89, 98, 99, 478 income (sustainable), 632, 633, 660 indicators: 101 biophysical and composite, 654, 655 Canadian environmental indicators, 628–9 Pearce-Atkinson, 650–2 example: Australia, 651 pressure state response model, 628 Proops-Atkinson, 652–4 UK environmental indicators, 630 and information, 249 intergenerational equity, 85, 86 irreversibility, 12 as non-declining consumption or utility, 84 and policy, 97, 98 preservation of opportunities, 86 as a steady state, 94, 95 strong, weak, 90, 91, 380, 654 and substitution possibilities, 87, 90, 476 sustainable Economic Welfare (see ISEW) sustainable yields, 92 sustainedness, 83 and technical progress, 477 and valuation, 379–80 weak (see sustainability, strong and weak) Sustainability gaps, 656 System of National Accounts (United Nations SNA), 666–9 Taxes: on emissions (see policy instruments) optimal tax, 543 Technical change, progress, 32, 176, 477 Terminal conditions, 516, 553 Thermodynamics, laws of, 8, 21, 22, 94, 95, 548 Three box carbon cycle model, 545, 547 Threshold effects, 26, 256–7, 544 Toronto Conference, 334 Total Allowable Catch (TAC) system, 587 Toxic wastes (see wastes) Tradeable permits (see marketable permits) Trade and the environment, 339–42 and environmental accounting, 652 Externalities, 340 Factor endowment hypothesis, 341 free trade, 339–42 GATT/World Trade Organisation, 339, 342 liberalising trade, 339 linkages, 339, 342 pollution havens, 342 second-best, 341 trade and welfare, 340, 342 Transactions costs, 261–3 Transferable permits (see marketable permits) Transfer coefficients, 180 Travel cost method (TCM) (see also valuation), 411–20 problems with, 415–17 travel time, costs of, 416–20 Tidbinbilla TCM survey, 418 trip generating function, 411–12, 415, 419 and weak complementarity, 411–12 zonal average approach, 413 Treaties, international environmental, 298–9 Tuna (yellowfin), 588 Uncertainty (see also risk), 94 decision theory, 459–61 assignment of subjective properties, 461 maximax rule, 460 maximin rule, 460 minimax regret rule, 461 games against nature (see game theory) imperfect information, 143–4, 248–9, 251–6 and optimal resource extraction, 526–7 radical, 256, 445 Uniform mixing (see pollution) United Nations Organisation, 299 United Nations Commission on Sustainable Development, 51 United Nations Conference on Environment and Development (UNCED), 50 Use value (see value) Utilitarianism, 56 anthropocentric, 59 classical, 56–8 criticisms of, 64, 65 preference satisfaction, 60 Utility: cardinal and ordinal, 60 discounted, 361 interpersonal comparisons, 61 utility functions, 106 intertemporal utility, 352–3 separability, 359 well-behaved, 431 utility maximisation, 117, 152, 404 and welfare, 359 Utility possibility frontier (intertemporal), 111 Valuation, 10 of amenity services, 376 attributes, 438 compensated demand functions (see Hicksian demands) demand theory and valuation, 442–3 individual utility functions, 442 direct and indirect approaches, 403 ethical objections to conventional valuation, 122 Hicksian and Marshallian demand functions, 405–7, 409, 442–3 Hicksian measures (of welfare change), 404 price changes: equivalent and compensating variation, 404–7 Subject Index Valuation (continued) quantity/quality changes: equivalent and compensating surplus, 408 Marshallian measures (of welfare change) consumer surplus, 122 rent gradient/pollution function, 436 weak complementarity, 409–11 willingness to accept compensation (WTA), 405 willingness to pay (WTP), 122, 405 Valuation techniques: direct (stated preference methods): choice modelling, 436 contingent valuation (see contingent valuation) indirect: hedonic pricing (see hedonic pricing) production function based techniques, 439 travel cost method (see travel cost method) non-market valuation, 373 Value (see also risk): dimensions of, 400–1 existence value, 402, 410 intrinsic value, 403 option value, 402 quasi-option value, 402 use value, non-use value, 402 direct and indirect (passive) use values, 402 of life, 214–15 total economic value, 402 Vienna Convention (1985), 320 Volatile organic compounds (VOC), 229 Voluntary exchange, 123 Walras law, 284 Waste accumulation and disposal, model of, 548–53 Wastes, emissions/residuals, 18, 19, 20, 549 Water pollution, 549 Weak complementarity, 409–11 Wealth, 660–3 Welfare economics, 7, 60 compensating variation (see valuation) consumers’ surplus, (see also valuation), 403 efficiency and optimality, 56, 89, 142 equivalent variation (see valuation) fundamental theorems of, 123, 124 intertemporal welfare economics, 352–62 intertemporal efficiency conditions (see efficiency) Welfare function (social), 123, 149, 486, 511 aggregation over individuals, 61, 62 distribution, 62 indifference curves, 62, 63 intertemporal, 67, 356, 513 intertemporal optimality, 112, 356, 510–14 maximising, 80, 81, 112, 511, 540 measures of welfare changes (see valuation) and optimality, 112 Rawlsian, 65 Willingness to accept compensation (WTA) (see valuation) Willingness to pay (WTP), (see also valuation) 121, 131 World Commission on Environment and Development (WCED), 49 Yield-effort relationship, 565, 566, 572 Zoning, 179, 216 699 ... first issue, are: Land Economics, Journal of Environmental Economics and Management, Ecological Economics, Environmental and Resource Economics, Environment and Development Economics The first... references and index ISBN 0-273-65559-0 (pbk.) Environmental economics Natural resources—Management Sustainable development I Perman, Roger, 1949– Natural resource and environmental economics. .. areas of interest, research and learning in natural resource and environmental economics xx Introduction Part I deals with the foundations of resource and environmental economics The first chapter