Economic Theories Related to Environmental Conservation
Theories of Common Pool Resources
Environmental quality is a vital public good, necessitating an understanding of its characteristics to address environmental challenges Public goods are categorized into pure public goods, congestive goods, and common pool resources (CPRs) Pure public goods, such as defense and radio broadcasting, can be enjoyed by all without diminishing their quality, while congestive goods, like public roads and bridges, become less efficient as usage increases CPRs, including clean air, water, and forests, are accessible to everyone but can suffer from overconsumption, leading to depletion and reduced quality These resources are further divided into renewable and non-renewable categories, with the risk of complete consumption if the rate of use surpasses their renewal rate.
While CPRs may exhibit characteristics similar to private goods based on economic theories, a public goods framework more accurately captures their unique traits Consequently, it is essential to explore the theory of public goods to enhance our understanding of CPRs.
Common Pool Resources (CPRs) are resources that are not solely managed by one entity, as defined by Tietenberg These resources, whether natural or man-made, are extensive enough to make it expensive to prevent potential users from benefiting from them, according to Ostrom Access to CPRs can be restricted to either an individual or a firm, or shared among multiple individuals or groups utilizing the resource simultaneously.
Understanding the treatment of CPRs in the market is crucial, as it highlights why environmental resources cannot be solely entrusted to market forces for their conservation Without intervention, international organizations would have no reason to engage in conservation efforts.
Normal private goods exhibit a supply function that increases with rising prices, as shown in Figure 1.1 In contrast, public goods, particularly common pool resources (CPRs), demonstrate a supply and price that remain unaffected by demand fluctuations Figure 1.2 illustrates that the supply increase for public goods is generally greater than that of normal private goods Consequently, public goods are inherently available for exploitation by all individuals without restriction.
S1 is the supply curve for a normal private good
Figure 1.1: Supply-Demand Relation for Normal Private Goods
S2 is the supply curve for common pool resources
Figure 1.1 and 1.2 show that Q‟‟>Q‟; therefore, CPRs are likely to be priced lower and exploited more than private goods
Figure 1.2: Supply-Demand Relation for CPRs
Supply and demand dynamics can be effectively illustrated through Total and Marginal Cost functions, as depicted in Figures 1.3 to 1.6 Typically, a total cost curve initially rises steeply, then increases at a slower rate before steeply rising again Maximum profit occurs at the point where Average Revenue (AR) equals Marginal Cost (MC), resulting in a market supply quantity of Q1 for normal private goods, as shown in Figure 1.3 Conversely, public goods are supplied in greater quantities than private goods, with Figure 1.5 indicating a supply quantity of Q2 The cost of acquiring environmental goods is minimal, as they are Common Pool Resources (CPRs), meaning the total cost curve primarily reflects harvesting operations Consequently, public goods or CPRs tend to be over-exploited compared to private goods, as evidenced by the Marginal Cost and Marginal Revenue analysis.
2 The relation Q2 > Q1 is clearly found by Figures 3-6 Also note that the relation P1 > P2 is established
Figure 1.3: Total Cost and Total Revenue Relation (Private goods) 3
Figure 1.4: Marginal Cost and Average Revenue Relation (Private Goods)
3 TR=Total Revenue, P=Price, TC=Total Cost, AC=Average Cost, AR=Average Revenue, MC=Marginal Cost
Figure 1.5: Total Cost and Total Revenue Relation (Public Goods) 4
Figure 1.6: Marginal Cost and Average Revenue Relation (Public Goods)
4 TR=aQ The coefficient a is smaller in Figure 1.5 than Figure 1.3 because of the characteristics of economic externality of CPRs
The over-exploitation of common-pool resources (CPRs) has significant implications for sustainable resource management, as illustrated in Figure 1.7 The vertical line S in the figure indicates the threshold for sustainable growth If consumption exceeds this level, moving the environmental amenity to the right of S, the resource can be managed sustainably Conversely, if consumption reduces the amenity level to the left of S, the resource cannot support sustainable management The term "sustainable" remains ambiguous in certain cases, such as with clean air For clarity, S represents the level at which resources can fulfill all environmental economic values; below this point, the capacity of CPRs to uphold global environmental standards is inadequate.
In Figure 1.7, we introduce the Original Sustainability Consumption (OS) line, representing the optimal consumption level for natural resources to remain completely sustainable annually The OS=0 line serves as a critical boundary, indicating that the net consumption of Common Pool Resources (CPRs) is either zero or negative by the end of each year, ensuring their long-term viability.
The OS=0 line serves as a valuable tool for illustrating the "desirable consumption point," highlighting the relationship between natural resource consumption and reproduction As consumption exceeds natural replenishment, resources diminish, causing a continuous contraction of the Production Possibility Curve (PPC) While OS=0 represents the true sustainable curve, consensus often defines sustainability at a level where human survival is feasible, permitting a decline in certain abundant resources This innovative concept effectively captures both environmental and resource sustainability in a single visual representation.
Figure 1.7: Natural Resource Budget Line and Sustainable Level 5
Further, there is a more important implication in this Figure 1.7 related to OS
The slope of the OS curve represents the velocity of resource reproduction, establishing key equations that serve as conditions for the sustainable management of renewable resources.
The new equation 6 illustrates the relationship between reproduction velocity, sustainable levels, and consumption, emphasizing that effective sustainable management must adhere to this equation As depicted in Figure 1.7, the consumption level that meets this requirement is below Q3.
The original indifference curve, 5 A, represents the economy's indifference to environmental amenities as an externality, while curve A' reflects the optimal consideration of these amenities When the indifference curve intersects the Production Possibility Curve (PPC) to the left of the S line, it indicates sustainable resource management, supported by the relationship d1 < S < d2 This demonstrates that achieving sustainability requires significantly lower resource consumption compared to a general approach to sustainable management.
6 In this equation, C stands for Consumption, E stands for Environmental Resources, S stands for
Sustainable Level, and OS stands for Original Sustainability.
Theories of Collective Actions and International Agreements
Negotiations within international organizations can be understood through the lens of collective action economic theories, which highlight the challenges posed by individual rational behavior Game theory suggests that when participants perceive an opportunity to benefit by defecting, it can lead to a collectively unfavorable outcome This is particularly evident in the negotiation processes regarding the distribution of contributions related to natural resources, where member countries often aim to minimize their own contributions at the expense of others Consequently, this behavior undermines the effectiveness of any arrangements made by international organizations.
To fully grasp the economic challenges faced by tropical environmental natural resources, it is essential to understand the collective action problem, initially introduced by Olson (1965) in the context of public goods provision This problem arises from the conflict between individual and collective interests, often illustrated through game theory models, as demonstrated in Box 1.1.
The economic theory of collective action examines how public goods are provided through collaboration among individuals or organizations, taking into account various situational contexts It also explores the influence of externalities on the behavior of these groups Strategies for collaboration and behavior are analyzed, often illustrated through the lens of game theory.
Basic Concept of Game Theory
Theory of Collective Actions is very often explained through game theories
Game theory effectively explains the challenges associated with collective action, particularly regarding public goods that are freely available once provided Countries often find it economically advantageous to refrain from contributing to these goods and instead adopt a "free-ride strategy," benefiting from the efforts of others As illustrated in Box 1.1, the economic values for Country A differ significantly depending on whether it contributes or free-rides, with similar patterns observed for Country B This common game scenario reveals that if both countries choose to defect by free-riding, the worst possible outcome becomes inevitable.
Collective action theory, as illustrated by game theory, suggests that individual participants pursuing their own economic benefits often fail to achieve desirable outcomes, particularly in the international community where no authority enforces cooperation Successful collaboration can lead to optimal results when conditions are met to prevent free-riding Game theory aims to identify equilibrium points achievable through collaboration strategies and the necessary conditions for their effectiveness Various strategies have been explored by economists, including the "game of chicken," which stems from the "prisoner's dilemma," and the concepts of "zero-sum" and "non-zero sum" games In non-zero sum games, free-riding is likely when benefits are closely distributed among participants, while in zero-sum games, significant differences in damages can create stronger incentives for collaboration Other strategic angles can also be considered within these game frameworks.
In the realm of game theory, various types of games exist, including simultaneous and sequential games, as well as those characterized by perfect or imperfect information, and symmetric or asymmetric structures Among these concepts, the Nash equilibrium stands out as a crucial principle, defined as the scenario in which no player can improve their outcome by unilaterally changing their strategy However, this thesis posits that the decision-making processes of international organizations and member countries are more effectively illustrated through the basic "prisoner's dilemma" framework, focusing primarily on trade benefits and potential sanctions within the open global community.
Coase Theorem
The Coase Theorem is generally defined as follows
Well-defined property rights and the ability for parties to make payments are essential for addressing externalities effectively When affected parties can negotiate without costs, they achieve an optimal outcome regardless of how legal responsibility for damages is assigned This ensures that the party receiving the rights benefits, while society as a whole attains the most efficient result.
The Coase theorem highlights that market equilibrium can be achieved for all types of goods, including environmental goods, under specific conditions It asserts that a market economy functions effectively when property rights are clearly defined; however, this is often challenging to implement under international laws.
International agreements are essential for addressing collective action problems by establishing a legal framework that member countries must adhere to To ensure the effectiveness of these agreements, economic sanctions or other punitive measures can be implemented.
The Coase Theorem faces challenges in real market economies due to its assumption of zero transaction costs for achieving efficient equilibrium among players with well-defined property rights In practice, even when property rights are established, identifying and reaching consensus on their implications is often complex, leading to overloaded courts dealing with civil property disputes The costs and time involved in legal proceedings can outweigh the potential benefits for defendants This issue is exacerbated in international contexts, where varying laws across countries significantly increase transaction costs, potentially preventing equilibrium in the global market Thus, international agreements must clearly define property rights related to environmental goods, but this is merely the first step The key is to reduce transaction costs to a manageable level for all parties involved, which can be facilitated by organizations with mechanisms to resolve disputes, such as the World Trade Organization (WTO), the only entity currently equipped with such capabilities.
Game Theory
Game theory, a branch of applied mathematics, analyzes interactions through formalized incentive structures known as "games." This field has diverse applications across economics, international relations, biology, political science, and military strategy It focuses on understanding both predicted and actual behaviors of individuals in games, as well as determining optimal strategies Various interactions, despite appearing different, can reveal similar incentive structures, thereby representing a specific type of game.
The most well-known and basic game theory is called the prisoners‟ dilemma
In this game, players' pursuit of rational and profit-driven behavior often leads to disastrous outcomes for everyone involved Environmental values are frequently ensnared in a prisoners' dilemma, highlighting the need to understand game theory mechanisms By applying these theories to environmental goods, we can work towards preventing their depletion in the international free market.
Advanced game theory, particularly cooperative game theory, plays a crucial role in the conservation of environmental goods by facilitating enforceable contracts This theory supports the creation of plausible contracts, which are essential for achieving sustainable market equilibrium in international environmental goods The thesis aims to explore whether an international agreement can establish conditions that foster these plausible contracts among market participants in the environmental sector.
Figure 1.8 illustrates a scenario where Country A negatively impacts the environmental quality of a domestic natural resource at point d1, prompting the international community to seek regulations aimed at reducing the damage to a more acceptable level, d2.
Clearly defined property rights can significantly reduce damage levels in the global community, allowing them to decrease from d1 to d2 However, in the international arena, country A retains the autonomy to choose d1 as its economically optimal level, exercising its absolute sovereign power to determine the extent of its economic activities.
According to Ostrom's 1990 article, the collective action problem can be effectively addressed through proper negotiation and information exchange prior to individual decision-making For instance, in Box 1.1, the bottom right illustrates the outcome achieved without international agreement, while the top left represents the outcome possible with such an agreement.
Box 1.1: International Agreement and Game Theory
IV is the result without an international agreement
I is the result with an international agreement
Figure 1.8 Contribution and Depletion Relation 7
7 MDA is the Marginal Damage Curve for Country A
MDG is the Marginal Damage Curve for the Global Community
MAC is the Marginal Abatement Cost Curve which represents the cost to alleviate the environmental damage
The relationship d1 > d2 indicates that the global community perceives environmental damage reduction as a cost-effective strategy, as it does not adversely affect economic stability Conversely, the source country views the costs of damage reduction as higher, since addressing the root causes of environmental harm could negatively impact its domestic industries.
1.5 Other economic concepts and theories
International organizations can analyze the protection of natural environmental resources through various economic concepts and theories, such as opportunity cost, monopolistic markets, and elasticity of substitution Understanding the opportunity cost of common-pool resources (CPRs) is essential to assess their true value Additionally, recognizing the mechanisms of production cartels, like those of OPEC, is crucial, as commodity agreements often aim to uphold profitable international prices for producing countries.
To effectively control the price of a natural resource, an international organization must understand the price elasticity of substitution, as this measures how price changes in substitute products affect those derived from the natural resource This understanding is crucial in the context of monopolistic market theory and its implications for international organizations.
Introducing price intervention measures, like quota allocation, in a natural resource market can significantly impact supply and demand dynamics According to monopolistic market theory, such interventions may lead to reduced competition, potentially resulting in higher prices for consumers By controlling the quantity available in the market, the responsible organization can influence market behavior, ensuring sustainable resource management while balancing economic interests.
Figure 1.9 depicts the market equilibrium level (E) compared to the monopolistically set production level (M), highlighting that monopolistic production is lower than market-oriented production This reduction allows for resource conservation through monopolistic measures Additionally, the monopolistic price level exceeds the market price level, enabling producers to generate adequate revenue despite the decrease in production.
Production restrictive measures can lead to significant issues, particularly the risk of chiseling among member countries These countries may be tempted to exceed their quota allocations, as the desired production level at price P2 is Q3 If multiple nations attempt to boost production beyond their limits to capitalize on the higher price, it could severely damage their resource assets Consequently, if all countries pursue additional revenue by selling at price P2, the resulting production level will rise to Q3, which far exceeds the output typically generated in a free market scenario.
Hence, for such production restrictive measures are to be successful, strict control over the producing member countries is imperative
The elasticity of substitution plays a crucial role in determining the effects of production restriction measures in monopolistic markets, as it influences how easily consumers can switch between different goods Understanding this concept is essential for analyzing the impact of such restrictions on market dynamics and overall economic outcomes.
Figure 1.10 illustrates a scenario where the elasticity of substitution between an environmental product and its substitute is high Initially, the price ratio of the two products is P1:p, with the market trading quantity of natural resources at Q1 and the substitute products at q1 However, if an international organization intervenes and raises the price of the natural resource, the price ratio shifts to P2:p.
When the elasticity of substitution between two products is high, the indifference curve intersects the new budget line (p-P2) at a point that strongly favors the substitute goods Consequently, the market quantity of the natural resource has significantly decreased from Q1 to Q2, while the quantity of substitute goods traded has increased from p1 to p2.
Application of Economic Theories to Environmental Conservation
1.6.1 Sustainability and Budget Line-Case Study for Forest Conservation -
Section 1.6 explores the application of theories related to international organizations' control mechanisms and their economic contexts Producing countries often argue for substantial compensation from consuming nations when asked to relinquish economic benefits derived from natural resource exploitation Conversely, consuming countries demand that producing nations also bear responsibility for safeguarding the global environment.
Two unofficial estimates from private researchers highlight the financial requirements for tropical forest conservation A 1992 study suggested that approximately 400 million US dollars per year is necessary, with a net requirement of 300 million dollars after accounting for 100 million dollars already allocated In contrast, another estimate indicates that the annual funding needed could be as high as 1.5 billion US dollars.
Before applying economic theories to the data, it is essential to understand the background figures related to tropical forest depletion The annual depletion rate of tropical forests is currently 0.8%, while the plantation increase rate was around 0.2% from 1980 to 1990, resulting in an annual net depletion rate of approximately 0.6% Figure 1.12 shows the production curves between tropical timber net consumption and forest exploitation, indicating that as long as the net depletion rate remains positive, the budget line will contract left of the sustainable boundary If the situation of global tropical forests deteriorates further, they will be unable to sustain sufficient resources.
10 The first research was made in 1992 by World Foundation for Environment and
The World Conservation Union (IUCN) conducted a second research study focusing on environmental services, particularly the capacity to absorb CO2, highlighting its significance to the global community despite the net depletion rate reaching zero.
Figure 1.12: Current and Possible Future Budget Lines 11
Sustainable management remains achievable despite a shrinking production curve, provided that the recognized value of the environment rises and consumption levels decrease, as illustrated by the transition from point A to point B in the figure.
Figure 1.13: Long-term Tropical Forests Depletion Perspectives 12
In this connection, the number of years required for complete depletion under this current net depletion rate is calculated as follows:
Case 1 0.6% per year (current rate)
The diagram highlights that achieving sustainable forest management by 2020 is unlikely if the depletion rate continues to rise; however, it remains feasible at the current rate To ensure true sustainability in forest management, it is essential to significantly lower the depletion rate.
If the rate changes to 0.3 and 1.2, the following time spun for complete depletion is expected
Case 2 0.3% per year (improved rate)
Case 3 1.2% per year (deteriorated rate)
Figure 1.13 illustrates that if the annual net depletion rate of tropical forests remains positive, they are at risk of being completely eradicated within the next century To ensure sustainable management of these forests, the net depletion rate must reach zero in the near future Achieving this goal requires either a reduction in the depletion rate, an increase in plantation rates, or both, in order to follow the Gradual Reduction curve depicted in the figure.
The international community's efforts towards sustainability are significantly influenced by the established sustainable boundary level If this level, denoted as S, is considerably lower than the threshold illustrated in Figure 1.13, it may take the global community many more years to achieve this objective.
To prevent the depletion of tropical forests, it is crucial to increase the total amount of these forests, especially when current stock levels are already higher than in previous years, such as 2010.
Figures 1.14 and 1.15 illustrate variations in the sustainable management of tropical forests Specifically, Figure 1.14 depicts a scenario where the international community aimed to maintain tropical forest levels at the year 2000 benchmark for its 2010 target To achieve this, forest depletion needed to revert to the S00 curve by 2010 However, this objective has become increasingly unlikely as forest depletion has continued unabated to the present day.
Figure 1.15 demonstrates a scenario where the international community sets a sustainable level significantly higher than the S00 level, driven by the recognition that tropical forests were already over-exploited by 2000 To align the depletion curve with the Sh level in the figure, the depletion rate of tropical forests would need to become negative, a target that has become virtually unattainable by the year 2000 Consequently, several countries have advocated for postponing the target year from 2010 to a later date.
Figure 1.14: The case sustainable level is set at 2000 13
Figure 1.15: The case sustainable level is much higher than present level
During the 2000-2010 period, the marginal cost associated with increased quantity, represented as ΔC/ΔQ, was significantly higher in Figure 1.15 compared to Figure 1.14 This disparity is a key factor contributing to the variations in the game, which will be discussed in the application chapter.
Figure 1.16 illustrates the marginal abatement cost (MAC) recognized by consuming countries, the marginal damage (MDp) perceived by producing countries, and the marginal damage (MDg) acknowledged by the global community This innovative approach highlights the relationship between individual countries and the global community, diverging from traditional marginal damage functions that focus solely on bilateral country interactions Currently, forest depletion is occurring at the intersection point d1, with a cost of 100 million US dollars to maintain this level However, if the global community aims to achieve a sustainable level of forest exploitation at point S, an annual contribution of 400 million US dollars would be necessary This requires an upward shift of MDp to MDg, indicating that consuming countries must increase their contributions by an additional 300 million US dollars to support sustainability efforts.
Figure 1.17 shows the case that 1.5 billion US dollars are required to achieve
To achieve level S of forest depletion by the 2010 target, a significant shift in the MDG curve is essential This requires a contribution of 1.5 billion US dollars from consuming countries.
In Figure 1.18, the marginal damage (MDp) remains constant while the marginal abatement cost (MAC) decreases to achieve level S, necessitating producing countries to implement measures or funding to support consuming countries According to the Coase theorem, if consuming countries are granted property rights to adjust environmental quality levels, this scenario becomes feasible However, in practice, producing countries maintain full sovereignty over their natural resources, as illustrated in Figure 1.16, where property rights are allocated to them In this case, the MAC curve remains unchanged while the MDp curve shifts to MDg, reflecting the responsibility of consuming countries.
Recommendations
To effectively conserve environmental resources, it is recommended that consumers fully contribute to a fund that compensates producing countries for forgoing economic benefits from natural resource exploitation However, this approach may face resistance from consumers, as the compensation amounts could be perceived as excessively high Additionally, it is crucial to recognize that both consumers and producing countries must share responsibility in this matter While this compensation measure presents a viable solution for environmental conservation, it may not be a sustainable long-term strategy.
Producers cannot realistically bear all responsibilities for conservation measures, as they are unwilling to forgo their rights and often lack the necessary funds to implement these measures independently Therefore, they require substantial assistance from consuming member countries to effectively engage in conservation efforts.
Another possible recommendation is that consumers provide the entire fund but the fund be used directly to the conservation measures for the environmental resources
In this case, however, the fund may not succeed if producing member countries do not recognize any values in the environmental assets
For the Fund to succeed, producers must acknowledge at least half the environmental value that consuming countries do In scenarios where there is no transfer, producers perceive no distinction between contributing and non-contributing solutions If producers align their values with those of consumers, the Fund's success is likely assured.
The success of the fund hinges on the implementation of penalty clauses within its regulations The effective introduction of these penalties can ensure the fund's success, independent of producers' acknowledgment of environmental values However, achieving consensus between all parties to establish effective penalty clauses may prove challenging.
To ensure balanced values between both parties, it is essential to engage in regular consultations and information sharing When both sides have access to the same information and understand each other's perspectives, they can align on environmental values This alignment can lead to the fund's success, even in the absence of penalty clauses.
In summary, the most effective approach involves implementing penalty measures alongside the non-transfer of funds as compensation However, these penalty measures require mutual agreement on environmental values from both parties The success and stability of the Fund are enhanced when producers and consumers share the same environmental values.
To foster cooperation between producing and consuming countries, it is essential for both sides to acknowledge shared environmental values International organizations should facilitate effective consultations to help these groups identify and align on common ecological principles.
Producers can contribute to the fund through non-cash means, such as implementing internal regulations and enhancing control measures for the export and consumption of their domestic resources While these non-cash contributions may reduce the economic benefits they could have gained from utilizing these resources, they effectively serve as a cash equivalent contribution to the fund.