Economics can be defined as "the study of the production, distribution, and consumption of wealth in human society." It looks at how individuals and groups make decisions, with the limited amount of resources available, to best satisfy their wants and needs. These choices, added together, are how we manage the tradable natural resources of the Earth. But how do we manage the non-tradable Global Commons?
As you may have guessed from that introduction, not all of the natural resources impacted by economic activity and valued by people are allocated by our markets. One example is our atmosphere, which gives us air to breath and protects us from the harshness of space. Burning fossil fuels and releasing ozone-depleting chemicals decreases the atmosphere's ability to provide us with a stable global climate and protect us from UV radiation, and therefore has impacted the well-being of people around the globe. Meanwhile, no portion of the atmosphere was ever owned, bought, or sold (for the most part).
As you can see, there are special management issues associated with Earth's natural resources that can't be traded on the markets. These issues require a different way of thinking from the management challenges associated with commodities, which markets themselves do a good job of managing.
The difference in thinking stems from transaction externalities - impacts of economic activity on other parties (and yourself). While certain wants and needs are being met, there other more basic wants and needs - clean air and clean water - that are being sacrificed. Developing ways to mitigate these impacts, which are not reflected in the cost of the associated products or services, is at the heart of natural resource management.
The goals of natural resource management are, as with so many other things in life, also its constraints. In no particular order, the goals of natural resource management are to maximize economic performance, address distributional equity, and to accommodate physical and institutional constraints.
Maximizing economic performance means allocating resources as efficiently as possible within society. It concerns the benefits received by both producers and consumers. Efficient allocation of resources maximizes the benefits received by all.
Addressing distributional equity concerns the fairness with which resources are allocated in society. An uneven distribution of wealth and skills reduces the ability of some individuals to benefit from the economic performance of an economy. Therefore, this goal concerns how this inequity can be mitigated.
Accommodating physical constraints simply involves recognizing that the Earth's natural resources are finite, some will last longer than others, and some are more accessible than others.
Institutional constraints include laws and regulations that firms and individuals must comply with in order to avoid penalties. One must decide whether and how to comply with these requirements. Each decision (full compliance, partial compliance, or non-compliance) implies different social, economic, and environmental consequences.
Resource managers make decisions in an attempt to accomplish these goals within applicable constraints. These decisions determine the provision and use of resources. So, which resources will be developed? At what levels? Over what time period? What regulations apply? What are the penalties for partial or non-compliance?
In the United States, the primary mechanism for allocating resources is the market. Economists recognize the ability of markets to direct resources to their most valuable uses. Markets accomplish this with prices, which signal the value of resources to society. Because members of society are required to pay the costs of using resources, markets encourage us to examine the alternative uses of resources and to choose the most valuable one. While markets do this automatically for many resources that are privately owned, markets have trouble accomplishing this for resources that are not privately owned - the commons.
Examples of un-priced resources include airsheds and watersheds. These natural resources have alternative uses including recreation, air and water purification, and dispersion of pollutants. However, the costs associated with those uses are usually not recognized in the prices that are set by markets. Without prices to represent the associated costs, markets will treat these resources as essentially free. Any resource that is provided free of charge is virtually guaranteed to be overused.
This is particularly troublesome when that resource provides us with life-sustaining services. When that occurs, markets fail to allocate resources in the most valuable manner to society (value means more than money). Government intervention in the form of laws and regulations is then justified to correct these market failures. This is not to suggest that markets do not fulfill an important role in resource allocation. Rather, markets sometimes require targeted adjustments to adequately reflect the costs of all affected resources and to allocate resources in the most beneficial way to society.
Given that, we are left with the following three implications for air, land, and water resource management:
1. A completely free market system will generate excessive amounts of unwanted and harmful pollution. We saw this as the west industrialized and now, as the developing world catches up.
2. Appropriate standards for environmental quality can be determined by examining the costs and benefits of pollution abatement.
3. Once an environmental standard has been established, public policies can be designed to accomplish that goal in a cost-effective manner.
The markets have done a decent job to date of managing our natural resources (with a little help from some targeted policies), but we can do much better.