Annual Review of Resource Economics - Volume 1, 2009

This brief retrospective note describes the author’s occasional contributions to the economics of natural resources. It emphasizes the role and interpretation of the Hotelling condition and discusses the reasons why that result plays so small a role empirically. The concept of sustainability is introduced in the simplest possible content, that of directly consuming a finite stock over infinite time. When the resources flow is an input into production along with capital that can be accumulated, the nature of sustainability changes and becomes more interesting. It is suggested, however, that to consider instead the eventual availability of a resource-free backstop technology may be just as interesting and more relevant. That concept is illustrated in the direct-consumption context but awaits further development in production economies.

The fundamental role that agriculture plays in development has long been recognized. In the seminal work on the subject, agriculture was seen as a source of contributions that helped induce industrial growth and a structural transformation of the economy. However, globalization, integrated value chains, rapid technological and institutional innovations, and environmental constraints have deeply changed the context for agriculture's role. We argue that a new paradigm is needed that recognizes agriculture's multiple functions for development in that emerging context: triggering economic growth, reducing poverty, narrowing income disparities, providing food security, and delivering environmental services. Yet, governments and donors have neglected these functions of agriculture with the result that agriculture growth has been reduced, 75% of world poverty is rural, sectoral income disparities have exploded, food insecurity has returned, and environmental degradation is widespread, compromising sustainability. Mobilizing these functions requires shifting the political economy to overcome antiagriculture policy biases, strengthening governance for agriculture, and tailoring priorities to country conditions.

New research on the political economy of policy-induced distortions to incentives for optimal resource use in agriculture and insights from the study of the dramatic reforms in former state-controlled economy has led to enhanced insights on the role of governance structures on policy making in agricultural and natural resources. This paper reviews these research developments and key new insights.

For more than a century, government policies have grossly distorted resource use in agriculture, both within and between countries. Earnings from farming in many developing countries have been depressed by a prourban bias in own-country policies as well as by governments of richer countries favoring their farmers with import barriers and subsidies. Both sets of policies reduce national and global economic welfare and inhibit economic growth; they also add to inequality and poverty in developing countries. Since the 1980s, however, numerous developing and some high-income country governments have reduced their sectoral and trade policy distortions. This paper draws on new empirical studies to show the changing extent of policy distortions to prices faced by the world's farmers since the 1950s. Modeling results provide an indication of how far those reforms proceeded between the early 1980s and 2004 and of how much scope remains for removing continuing inefficiencies in global agricultural resource use.

This paper presents a framework for analyzing the structure of contracts for public-private partnerships (PPP) that produce products and services that generally include mixtures of both public and private goods. A three-stage framework, sourced with the incomplete contracting and control rights literature, is advanced to evaluate the successes and failures of a variety of PPP in the natural resources. These case studies provide unique insights into the contract structures that are typically designed for the management and provision of impure public goods. We demonstrate the desired contract structure of a PPP depends on the type of good or service produced, and it is this pivotal point that generally results in shared authority in the extraction or production and consumptive distribution of natural resources.

We survey recent developments in the theoretical and empirical literature on the economic effects of environmental regulation on various aspects of market structure including entry, exit, and size distribution of firms and market concentration.

The large-scale disasters that have occurred since 2001 suggest that we have entered a new era of catastrophes. We are more vulnerable to extreme events as a result of the increasing concentration of population and activities in exposed areas of the country. The question is not whether large-scale catastrophe will occur, but when and how frequently they will strike. One key question is, Who will pay for the economic losses future disasters will inflict? This paper discusses how new catastrophe risk markets can be developed to provide the necessary financial coverage to make our country more resilient. We look specifically at insurance-linked financial instruments to complement traditional insurance and reinsurance. We also propose the development of long-term insurance and long-term loans to overcome behavioral biases such as myopia and misperception of risks. The paper concludes by proposing risk management strategies that apply to other extreme events such as the financial crisis of 2008–2009.

A large literature has developed that documents a negative association between the presence of natural resources and economic development. In this paper we explore the empirics and theories of the so-called resource curse and try to assess its robustness. We conclude that there are many open questions and that the case of the curse needs revision and nuance.

Many of the main scientific challenges in the fields of development, environment, and resource economics have a microeconomic foundation wherein behavioral elements play a significant role. Preferences with respect to risk, time, societal others, and the environment shape the decision-making processes of individuals. Economic experiments have been extensively carried out in the lab and in the field to test the predictions of behavioral theories; some have had a particular focus on development and environmental issues. Random interventions have also proven to be an important source of information with respect to experimentation in development and policy design. This article identifies the contributions of experiments and random interventions and reflects on the value of having a productive dialogue—in connection with said experiments—with the main stakeholders regarding the problems being studied.

We consider health and environmental quality in developing countries, where limited resources constrain behaviors that combat enormously burdensome health challenges. We focus on four huge challenges that are preventable (i.e., are resolved in rich countries). We distinguish them as special cases in a general model of household behavior, which is critical and depends on risk information. Simply informing households may achieve a lot in the simplest challenge (groundwater arsenic); yet, for the three infectious situations discussed (respiratory, diarrhea, and malaria), community coordination and public provision may also be necessary. More generally, social interactions may justify additional policies. For each situation, we discuss the valuation of private spillovers (i.e., externalities) and evaluation of public policies to reduce environmental risks and spillovers. Finally, we reflect on open questions in our model and knowledge gaps in the empirical literature including the challenges of scaling up and climate change.

Three independent literatures have contributed to the understanding of irreversibility in economics. The first focuses on the future opportunities forgone by investments with irreversible consequences. The second considers irreversibility (and hysteresis) in the context of the dynamics of systems characterized by multiple equilibria. The third, with roots in complex systems theory, focuses on entrainment—a phenomenon recognized in economics as lock-in or lock-out. This paper disentangles the different strands in the economic analysis of irreversibility in order to identify the core ideas involved and to connect them to arguments in the parallel literatures on sustainability and uncertainty.

We review the empirical literature that extends and tests the Hotelling model of the optimal depletion of an exhaustible resource. The theory is briefly described to set the stage for the review of empirical tests and applications. Those tests can be roughly divided into two broad categories—descriptive and structural—and we discuss the strengths and weaknesses of each before presenting the empirical studies of optimal extraction under conditions of exhaustibility. We also discuss some econometric pitfalls that applied researchers face when attempting to test the model.

Time and uncertainty constitute essential ingredients to many of the most challenging resource problems. With respect to the time dimension, agents are generally assumed to have a pure time preference as well as a preference for smoothing consumption over time. With respect to risk, agents are generally assumed to be Arrow-Pratt risk averse. The discounted expected utility model assumes that aversion to risk and aversion to intertemporal fluctuations coincide. This review discusses models and concepts that aim at disentangling time and risk attitude and briefly sketches a generalization of risk attitude to situations where uncertainty is not captured by unique probability measures. This paper reviews resource economic applications and relates the concepts to the debate on the social discount rate.

The literature on taxation of rents from nonrenewable resources uses different theoretical assumptions and methods and a variety of empirical observations to arrive at widely diverging conclusions. Many studies use models and methods that disregard uncertainty, investigating distortionary effects of different taxes on whether, when, and how to explore for, develop, and operate resource deposits. Introducing uncertainty into the analysis opens a range of challenges and leads to results that cast doubt on the relevance of studies that neglect uncertainty. There are, however, several ways to analyze uncertainty regarding companies' behavior, resource price processes, and diversification opportunities, all with different implications for taxation. Methods developed in financial economics since the 1980s, though promising, are still not in widespread use. Additional topics covered in this review are optimal risk sharing between companies and governments, time consistency and fiscal stability, the relationship between taxes and discount rates, tax competition, and transfer pricing.

Land use and land-use change can result in the emissions of greenhouse gases that cause climate change. Climate change also affects the productivity of land, which in turn leads to further land-use change. This paper explores the growing research on both topics. The land-use emission literature has focused on deforestation (harvests) and ignored the fact that harvests have led to a much younger and therefore growing global forest. Taking this into account, mankind’s current and future influence over land use will have a small positive effect on reducing greenhouse gas emissions. Although the literature initially focused on climate impacts alone, when adaptation is taken into account we find that climate change is likely to have benign net global impacts on market sectors related to land use. Climate impacts on nonmarket sectors, however, are much more poorly understood or measured. Furthermore, it is not yet clear whether governments will adapt or maladapt to climate change.

Between 1950 and 2030, the share of the world's population that lives in cities is predicted to grow from 30% to 60%. This urbanization has consequences for the likelihood of climate change and for the social costs that climate change will impose on the world's quality of life. This paper examines how urbanization affects greenhouse gas production, and it studies how urbanites in the developed and developing world will adapt to the challenges posed by climate change.

We contrast structural and reduced form empirical studies in environmental and resource economics. Both methodologies have their own context-specific advantages and disadvantages, and should be viewed as complements, not substitutes. Structural models typically require a theoretical model and explicit assumptions about structural errors in order to recover the parameters of behavioral functions. These estimates may be required to measure general equilibrium welfare effects or to simulate intricate feedback loops between natural and economic processes. However, many of the assumptions used to recover structural estimates are untestable. The goal of reduced form studies is, conversely, to recover key parameters of interest using exogenous within-sample variation with as few structural assumptions as possible—reducing reliance on these assumptions assists in establishing causality in the relationship of interest. Reduced-form studies do, however, require assumptions of their own, e.g., the (quasi) randomness of an experiment with no spillover effects on the control group.

Scientific evidence suggests that economic activity is threatening global biodiversity in ways that could severely degrade nature's flow of ecosystem services. Yet, there is relatively little work in economics that addresses biodiversity loss. Some economists have called for better integration of economic and ecological models to address biodiversity and the attendant ecosystem services. Current integrated approaches in economics are discussed, and they take in ecosystem services, ecosystem externalities, and substantial ecological modeling. Much of the modeling uses Lotka-Volterra equations, which are standard in ecology, although there is concern that the equations lack the microfoundations of plant and animal behavior. An alternative approach is to admit microbehavior using economic optimization techniques that build adaptive ecological systems. However, much more effort is needed to assess whether admitting more ecological detail into economic models will be fruitful.

This paper discusses both the opportunities for and the challenges associated with integrating economics and ecology in the study of ecosystem services. We distinguish between integration in positive versus normative analysis. There is rapid growth in positive research that combines the two disciplines to provide insight and better understanding of the bidirectional linkage between economic and ecological systems. This research is a crucial part of addressing growing large-scale environmental challenges. This integration is equally important, but potentially much more difficult, in normative analysis, especially when interdisciplinary groups include individuals with different views regarding appropriate normative criteria. In such cases, reaching consensus can be difficult and slow, even when the practical implications of the different perspectives (i.e., the general policy prescriptions they imply) are the same. We suggest an approach for increasing the scope for collaboration among economists and ecologists in normative analysis.