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AN INTRODUCTION TO ECONOMICS FOR CONSERVATION PROFESSIONALS

This is an abbreviated version of the economics piece featured in the online tools catalog. I would like to thank Brian Czech and Murray Rudd for their contributions and comments, and Robin Naidoo, Kate Krause, and Diane Russell for their excellent comments. Any remaining errata are my fault. I would appreciate any feedback on this piece. Please write me at nejemraheem@yahoo.com

Economics is the study of how humans allocate any resource that exists in insufficient quantity to satisfy all users. The major divisions of economics are macroeconomics (interactions at the national and international level) and microeconomics (interactions at the level of individuals and corporations). Because most conservation challenges engage groups of individuals functioning at scales smaller than nations, most economists who work on environmental issues are microeconomists. Global and cross-border issues such as climate change and invasive species also render macroeconomics, which addresses trade and economic growth, pertinent to conservation.

Most economics taught in universities and applied by government agencies is a subset of neoclassical economics. Neoclassical economics relies on several fundamental assumptions about human behavior, such as ordered and rational preferences. Two further assumptions central to neoclassical economics are that individuals maximize utility (measurable satisfaction), and that corporations or firms maximize profit (total revenue minus total cost).

Microeconomics is therefore utility-theoretic, or predicated on a "utility function," an algorithm that describes the relationship between an individual's consumption of a good or service and the satisfaction derived from that consumption. Economic theory posits that under certain conditions, an unfettered market (where buyers and sellers can communicate and exchange) will tend to allocate resources to the highest bidder. Because that bidder is willing to pay the highest amount for the resource, it follows that he or she values the resource more than any other bidder. Accordingly, it can be said that the highest bidder "should" receive the resource. This argument is contentious, particularly outside the discipline.

Neoclassical macroeconomics arose principally from the work of John Maynard Keynes during the Great Depression. Prior to the Depression, many economists believed and taught that markets in the macroeconomy responded smoothly to shifts in demand or supply and yielded new equilibria fairly rapidly. This frictionless movement suggested there was little need for government intervention in the form of monetary policy (money supply and interest rates) or fiscal policy (taxes and government spending). During the Depression, markets repeatedly failed to work smoothly. Economists realized that smooth transitions were based on assumptions such as full employment and maximized production capacity. Keynes demonstrated that slack in the economy (suboptimal production, unemployment) resulted in slow or "sticky" transitions between equilibria. Keynes and his followers advocated the importance of policy interventions.

Schools of Thought

Within microeconomics, the most conservation-relevant subfields are natural resource, environmental, ecological, and institutional economics. Natural resource economists focus on resource extraction, generally seeking optimal rates of withdrawal. Environmental economists consider allocation of environmental goods and services in a market context. They generally seek to define prices for environmental benefits and costs, which often do not have known prices, and optimize the allocation of benefits and costs via a price mechanism. Environmental economics deals with "market failures" and "externalities."

Market failure refers to poor allocation of resources due to the absence of one or more of the prerequisites for functioning markets. These prerequisites include perfect information about the good or service and freedom from externalities. An externality is an outcome of either consumption or production whose effects are not paid for ("internalized") by the producer or consumer. Externalities can be positive (e.g., public health benefits of vaccinations) or negative (e.g., coastal erosion due to destruction of mangrove forests for aquaculture). Economists believe that goods and services fall into the "market failure" category for many different reasons. For example, we often lack complete information about the goods and services that ecological systems provide. Markets therefore cannot allocate goods and services efficiently because we don't understand the true value of goods and services or the costs of their destruction. Environmental economists regard market failure as a reason why environmental resources often are consumed at an unsustainable rate or destroyed - resources simply aren't priced correctly.

Ecological economics generally is not defined as a subdiscipline of neoclassical economics, but views economics as a subdiscipline of ecology. The work of ecological economics arises from natural laws, particularly the laws of thermodynamics. To ecological economists, a market system is an inappropriate concept to use for modeling natural phenomena, so the absence of market properties is not a serious problem. Among the fundamental concepts of ecological economics are that economy is subject to biophysical constraints, there should be globally equitable distribution of the goods and services necessary for a high quality of life, and environmental management should be both economically efficient and inherently precautionary and adaptive.

The essential premise of institutional economics is that the institutions or "rules of the game" governing transactions in any system are what define that system, rather than generalizations about human behavior. One difference between institutional and neoclassical economics is the concept of bounded rationality. Neoclassical microeconomics assumes that all agents are rational and base decisions on a perfect conceptual model. Bounded rational agents instead are limited in their ability to formulate and solve complex problems to process information. Another difference between institutional and neoclassical economics is their treatment of transaction costs, the costs (monetary, time) that attend any transaction. Neoclassical economists often dismiss transaction costs as superfluous to the actual transaction. Laws (institution) governing the sale of water rights (transaction) are perceived by neoclassicists as an impediment to a functioning market. To an institutionalist, transaction costs are central to an analysis.

Economics and Conservation

Economics contributes theory, methods, and practical experience to assessment of human interactions and their influence on conservation. All of the schools of economic thought can contribute via

-- Support to conservation initiatives through fieldwork, data collection, knowledge of human interactions and markets, and methodologies such as linking GIS with economic data to model conservation decisions

-- Critical engagement with conservation initiatives from the perspective of market and non-market behavior; rectifying inadequate social science inputs, such as historical and institutional analyses, to conservation planning

-- Support for alternative paradigms of conservation such as community-based conservation, rights-based conservation, and alternative natural resource management regimes

-- Planning, funding, implementing, and evaluating conservation initiatives from an economic perspective, and including these evaluations in cost - benefit analyses

Nejem Raheem

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