ENHANCING THE USE OF ECONOMIC TOOLS IN MANAGING

NATURAL RESOURCES & THE ENVIRONMENT

By

Dr. El-Sayeda I. MoustafaProfessor of Economics &

Chairperson of the Economic department

University of Alexandria - Egypt

IntroductionNatural resources (NR) and the environment are

part of any economy’s assets and are considered a very essential factor of production.

(NR) & the environment are vital productive assets, just like physical capital (machines, buildings, roads, computers, etc.) and human resources.

Efficient Management of the (NR) wealth presents a real challenge – along with other sources of challenge- for any “sustainable development strategy”.

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Questions such as:• How much of the (NR) stock to exploit? (The

rate of use) • For what use? (Resource allocation among users) • When? (Present uses vs. future uses) • How? (Choice of exploitation technology)

• At what value? (market prices, other charges, non-market valuation,….. etc).

occupy the core of the field of the “Economics of the Natural Resources & the Environment”

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The economics of (NR) & the environment has became a very busy and growing field of studying on the international arena during the past few decades.

The interactions of the “NR base”, the “environment” and the “production” in any economic system is currently treated as a fundamental component of any effective plan for “sustainable development”.

In Egypt, unfortunately, many aspects of such studies are still absent, lacking, or inadequate.

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The second half of the 20th century has witnessed rising concerns regarding how to achieve efficient use of the natural and environmental resources.

Meanwhile, there was a wide recognition that the existing practice in the market place may inadequately conserves these resources. Many of the resources are subject to either “overuse” and /or “misuse” by all groups of beneficiaries (consumers, producers and governments).

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Efficient use of a renewable natural resource implies a pattern of use that:

• maintains the flow of the services (amenities, reefs, …) and products (agricultural products, fish, timber, …) generated by the resource, and

• Maximize the value of its benefits.

Whereas, the efficient use of a depletable natural resource involves the idea of distributing its finite stock over many periods of time to benefit the current and future generations , as well.

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An efficient use of a resource is achieved when it has an economic value equivalent to its marginal productivity (or marginal benefit).

This simply implies that we must have (or create) and employ the “real economic values” of the (NR) and the environment when it comes to design their allocation plans and conservation policies. These real values must become an integrated part of our economic system.

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The Significant Absent Role of Market Prices

Many consider the market price of a (NR) as the best measure for its true economic value.

WHY? Because:• It reflects the value of the marginal

benefits to the “USER” of the resource.• It accounts for the marginal cost of

provision to the “SUPPLIER” of the resource. 8

Unfortunately, this is not always the case with many

types of (NR) and the environment.

WHY?!

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One major feature of the use of many natural resources is that its market values –if exists- do not reflect or capture all the benefits and or the costs of using the resource. Hence, the existing market price will be distorted and will tend to give wrong signals to producers and consumers by over-use or over-production of the resource .

This is a case of a “failure of market mechanism” in achieving efficiency of resources allocation and use.

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Market failure may occur due to any or all of the following reasons:

• The lack of / or weak “property rights”.

• The public goods and /or the common property characteristics.

• The existence of “externalities”, and• The type of the market structure

(being monopolistic, for instance).

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Correcting for market failure could be done by:

The use of “economic incentives”,

The use of “command & control” mechanisms (it is not efficient), or

The use of “voluntary agreements”, such as “Hedonic prices approach”, and / or

Correction of the “property rights” institutions.

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Correction through “market solutions” & “economic incentives” requires to:

1) Quantify the effect of the distortion and give it a ($) value. This could be accomplished by the use of certain tools known as “Valuation techniques”.

2) Internalize that estimated value in the price of the natural resource through the use of various “economic tools” such as:

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Taxes (such as carbon taxes). Selling Licenses. Trading permits (such as pollution permits). Transferable quota system (to prevent the

free access problem, in fishing, for instance). Special charges (such as emission fees).Subsidies (to improve technology of production

or internalize a positive externality) .

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Each one of those economic tools has its own advantages and disadvantages with respect to aspects covering:

1. Effectiveness in achieving sustainability or curbing environmental degradation.

2. Facility to cope with dynamic changes.3. Being an adequate source of revenues to

the government or as a source of finance for required investments.

4. Cost of its administration and enforcement.

5. Its effect on the “poor” and “equity” issues.

6. Information needed for its application. 15

Evaluation of Non-Traded (NR) & Environmental Services

Some of the (NR) and the environmental goods and services are not handled through the market mechanism. If it is left out of the market place, it will have no market prices.

In such cases economist face a problem of how to place a monetary value on effects that are non-marketable (biodiversity or intrinsic values, for instance).

Such problems are solved by “non-market valuation methods” using specially designed surveys to reveal willingness to pay.

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Non-Market Economic ValuationThe objective of attaching monetary values to

a (NR) or its services is to make them comparable with other goods in the economy to enable us to formulate plans, design policies and make decisions for its protection and conservation.

Valuation should include both: All Benefits associated with using or

conserving the resource (direct, indirect, option and existence benefits), and

All types of costs incurred by the degradation or the depletion of the resource.

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Different valuation problems require different valuation techniques.

Non-market valuation methods can be broadly classified into two categories:

1) “Stated preference models” that relies on using surveys to infer the value that people place on the (NR).

“Contingent Valuation Method (CVM), is the most common model to estimate respondents’ willingness to pay (WTP) for a specific policy program, or how much compensation they would be willing to accept (WTA) for the loss of the (NR) use .

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2) Revealed preference (RP) models, such as:

a) Travel Cost Method (TCM)b) Hedonic Pricing Method (HPM)c) Cost (or Expenditure) Methods, andd) Benefit Transfer Methods.

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Recommendations for Capacity Building

What to do to enhance utilizing the “market economic instruments” and the “non-market valuation techniques” to capture and / or reveal the real economic values of the resources?

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1) Increase public awareness of the (NR) and environmental problems through:

*educational programs in schools, *NGO’s efforts, *use of the penetrating media.

2) Mobilize private financial resources for investment in resources’ conservation.

3) Design local and national policies to provide economic incentives for environmental protection and to transmit correct price signals for the use of natural resources.

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4) Stress the need for “property rights”.

5) Provide adequate resources for the enforcement and monitoring of firm legislation.

6) Encourage technological development and search for substitutes as well as “recycling”.

7) Support the idea of creating a “green accounting system”.

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8) Gradually introduce the use of pricing and charges for basic resources.

9) Push for changing the consumption pattern of (NR).

10)Enhance the information system and data availability.

11) Reduce poverty and illiteracy that triggers:

* ignorance, * corruption, * resource misuse. 23

12) Mobilize political will towards the change.

13) Increase the youth involvement.

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