Resource Economics

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Resource Economics


As a subfield of economics, resource economics examines the allocation of natural resources between uses and over time. Natural resources have enjoyed a prominent role in the history of economic thought. French physiocrats Francois Quesnay (16941774) and Anne Robert Jacques Turgot (17211781) considered in the mid-eighteenth century that agriculture (land) creates all value and supports manufacturing and service sectors in the economy. Land had a central role also in classical political economy, particularly in the works of English political economists Thomas Malthus and David Ricardo. Later in the late-nineteenth century, English economist Stanley Jevons (18351882) devoted attention to coal as the crucial natural resource for industrialization and growth in Great Britain.

Land economics emerged in the United States in the early decades of the twentieth century as the immediate predecessor of natural resource economics; this body of theory addressed economic issues related to agriculture and agricultural land in particular. Economists have developed major theories in resource economics since the 1930s. Harold Hotelling (18951973) suggested that reserves of nonrenewable resources such as ores, coal, and oil could be considered capital assets. They can either be extracted now or left for the future to appreciate in value. The decision to extract the reserve depends on the relative returns of the two alternatives. Hotelling argued that the optimal extraction rate of a resource equates the change in its net price (price net of extraction costs) with the interest rate or the rate of return from other capital assets. This is known as the Hotelling Rule. Its significance lies in underlining the role of interest rate in extraction decisions.

Economist H. Scott Gordon (b. 1924) and fisheries scientist Milner B. Schaefer (19121970) produced the key insights into renewable natural resources when they combined biological and economic models of fisheries. The biological model postulates a bell-shaped relationship between a fish population (stock) and its growth. Key aspects of the model also include a minimum viable stock level and the natural equilibrium (or natural maximum stock level), and the maximum sustainable yield at some intermediary level of stock. This biological model can be transformed into an economic one by assuming constant prices for the fish and a direct relationship between the fishing effort and the size of stock, and by recognizing that harvesting involves cost. The bell-shaped relationship now depicts the revenue from fishing, while total costs of harvesting increase monotonously with fishing effort. The efficient level of catch is achieved at a level of harvesting below maximum sustainable yield when the net benefits as the difference between revenue and cost are maximized. However, in the case of open access fisheries, it is profitable for fishermen to increase their catch until their marginal revenue equals their marginal costs. While individually rational, this results in excessive and economically inefficient harvesting, and suggests controlling of harvesting levels by regulating gear or imposing catch quotas. More recent work in resource economics, such as that of economist V. Kerry Smith, frequently focuses on the monetary valuation of non-market environmental harms, risks, and benefits.

Other contributions to understanding natural resource use and problems associated with it have come, for example, from environmentalist Garrett Hardin (19152003). His application of game-theoretic ideas to the use of pastures and other natural resources, in 1968, popularized the notion of the Tragedy of the Commons as an explanation for the degradation and depletion of renewable natural resources. While Hardin erred in attributing the destructive competition for resources to the commons (instead of open access to a resource), his game theoretic analysis of natural resource use problems shifted attention away from the conditions of optimal inter-temporal allocation to factors which engender nonoptimal outcomes and institutional arrangements that can assist in avoiding them. New institutional scholars such as Elinor Ostrom have popularized this approach in research on the use and management of renewable natural resources since the early 1990s.

SEE ALSO Externality; Malthus, Thomas Robert; Natural Resources, Nonrenewable; Overfishing; Pollution; Resources; Tragedy of the Commons


Gordon, H. Scott. 1953. An Economic Approach to the Optimum Utilization of Fishery Resources. Journal of the Fisheries Research Board of Canada 10: 442457.

Hardin, Garrett. 1968. The Tragedy of the Commons. Science 162 (3859): 12431248.

Hotelling, Harold. 1931. The Economics of Exhaustible Resources. Journal of Political Economy 39 (2): 137175.

Kula, Erhun. 1998. History of Environmental Economic Thought. London: Routledge.

Ostrom, Elinor. 1990. Governing the Commons: The Evolution of Institutions for Collective Action. Cambridge, UK: Cambridge University Press.

Schaefer, Milner B. 1957. Some Considerations of Population Dynamics and Economics in Relation to the Management of the Commercial Marine Fisheries. Journal of the Fisheries Research Board of Canada 14: 669681.

Smith, V. Kerry, William H. Desvousges, and Ann Fisher. 1987. A Comparison of Direct and Indirect Methods for Estimating Environmental Benefits. American Journal of Agricultural Economics 68 (2): 280290.

Jouni Paavola

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Resource Economics

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