Economic Theories Related to Environmental Conservation
Theories of Common Pool Resources
Environmental quality is a vital public good, necessitating an understanding of public goods to address environmental challenges Public goods are categorized into pure public goods, congestive goods, and common pool resources (CPRs) Pure public goods, like defense and radio broadcasting, benefit everyone without diminishing in quality regardless of consumption In contrast, congestive goods, such as public roads and bridges, are accessible to all but can become overcrowded, leading to decreased efficiency without affecting the total quantity CPRs, including clean air, water, and forests, are not classified as private goods under current laws, allowing free access and exploitation on a first-come, first-served basis However, increased consumption of CPRs can lead to depletion and deteriorating quality CPRs can also be divided into renewable and non-renewable resources, with unsustainable consumption rates risking total depletion.
While CPRs may exhibit characteristics similar to private goods based on economic theories, a public goods analysis offers a more accurate understanding of their nature Thus, it is essential to introduce the theory of public goods to better comprehend the features of CPRs.
Common Pool Resources (CPRs) are defined as resources that are not solely controlled by one entity, making it challenging to exclude users from benefiting from them These resources, which can be either natural or man-made, are typically large enough to incur costs for exclusion Access to CPRs can be restricted to an individual or a group of individuals, allowing multiple users to utilize the resource simultaneously.
Understanding the treatment of CPRs (Common Pool Resources) in the market is crucial, as it highlights why environmental resources cannot be solely entrusted to market forces for their conservation Without this understanding, there would be no need for international organizations to intervene in conservation efforts.
Normal private goods exhibit a typical demand and supply relationship, where supply increases with rising prices, as shown in Figure 1.1 In contrast, public goods, particularly common pool resources (CPRs), are not influenced by demand fluctuations; their supply and pricing remain stable regardless of demand changes Figure 1.2 illustrates that the supply increase for public goods is generally more significant than that of normal private goods Consequently, public goods are inherently available for free use by anyone.
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
The supply and demand dynamics can be depicted through Total and Marginal Cost functions, as illustrated 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 when Average Revenue equals Marginal Cost (AR=MC), leading to a supply quantity of Q1 for normal private goods, as shown in Figure 1.3 In contrast, the supply of public goods exceeds that of private goods, with Figure 1.5 indicating a supply quantity of Q2 The cost of acquiring environmental goods, classified as Common Pool Resources (CPRs), is minimal, reflecting only harvesting costs on the total cost curve Consequently, public goods or CPRs tend to be over-exploited compared to private goods, as demonstrated 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 implications of over-exploitation of common-pool resources (CPRs) for sustainable resource management are illustrated in Figure 1.7 In this figure, the vertical line S indicates the threshold for sustainable growth When consumption exceeds the level represented by S, the resource can be sustainably managed; however, if consumption falls below this point, the resource cannot support sustainable management It is important to note that the term "sustainable" lacks a clear definition in some CPR contexts, such as clean air To clarify environmental concerns related to these CPRs, S is defined as the level at which resources can fulfill all environmental economic values Consequently, if consumption is below this threshold, the CPR's capacity to uphold global environmental values is inadequate.
In Figure 1.7, we introduce the Original Sustainability Consumption (OS) line, which represents the optimal level of consumption where natural resources remain fully sustainable in their original net amounts annually The OS=0 line serves as a crucial boundary, indicating that the net consumption of Common Pool Resources (CPRs) is consistently zero or negative by the end of each year.
The OS=0 line serves as a valuable tool for illustrating the "desirable consumption point," highlighting the relationship between resource consumption and natural reproduction As consumption exceeds this sustainable level, resources will diminish, resulting in a continuous contraction of the Production Possibility Curve (PPC) While the OS=0 curve represents an ideal of absolute sustainability, consensus often defines sustainability at a level where human survival is possible, permitting a reduction in certain abundant natural resources The introduction of the OS=0 concept is innovative as it effectively visualizes both environmental and resource sustainability within a single framework.
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 essential equations for the sustainable management of renewable resources.
The new equation 6 illustrates the relationships 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 criterion is below Q3.
The original indifference curve, labeled 5 A, reflects the economy's indifference to environmental amenities as externalities, while the optimal curve, A', incorporates the value 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 general sustainable management practices.
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, as highlighted by Field Game theory suggests that when participants can benefit from defecting, their rational behavior can lead to unfavorable outcomes for everyone involved This is particularly evident in the negotiation processes concerning the distribution of contributions related to natural resources among member countries Each nation tends to minimize its own contributions at the expense of others, which undermines the effectiveness of any arrangements made by international organizations.
To fully grasp the economic challenges facing tropical environmental natural resources, it is essential to understand the collective action problem, which was first introduced by Olson in 1965 concerning the provision of public goods by organizations This problem arises from the conflict between individual and collective interests and is often illustrated through game theory models.
The economic theory of collective action examines how public goods are provided through the collaboration of multiple individuals or organizations It explores various forms of collaboration based on specific situations and analyzes the effects of externalities on individual and group behavior Additionally, the theory incorporates various strategies related to collaboration and behavior, which can be effectively illustrated through game theory applications.
Basic Concept of Game Theory
Theory of Collective Actions is very often explained through game theories
Game theory offers a compelling framework for understanding the challenges associated with collective actions, particularly in the context of public goods, which are accessible to all once made available This creates an incentive for countries to adopt a "free-ride strategy," where they benefit from the contributions of others without contributing themselves As illustrated in Box 1.1, the economic outcomes for Country A and Country B differ significantly based on whether they choose to contribute or free-ride The game depicted reveals that if both countries opt to defect by free-riding, they inevitably face the worst possible outcome This highlights the critical nature of cooperation in managing public goods effectively.
Collective action theory, illustrated through game theory, suggests that individual participants seeking to maximize personal economic benefits often fail to achieve optimal outcomes, particularly in the international community where no authoritative force compels cooperation Successful collaboration can lead to desirable results when participants adopt a "collaboration strategy," which requires specific conditions to prevent free-riding The primary focus of game theory is to identify equilibrium points achievable through collaboration and the conditions that facilitate such strategies Various game formats, such as the "game of chicken" and "Prisoner's dilemma," highlight different strategic considerations Non-zero sum games may encourage free-riding when benefits are evenly distributed, while significant disparities in outcomes in zero-sum games can increase the incentive to collaborate Thus, exploring diverse game strategies reveals additional insights into collective action dynamics.
The diversity of game types, such as simultaneous and sequential games, perfect and imperfect information games, and symmetric and asymmetric games, illustrates the various conditions that can shape gameplay A key concept in collective action is the Nash equilibrium, which is the point where no player can improve their outcome by changing their strategy unilaterally However, this thesis posits that the decision-making processes of international organizations and member countries are more effectively illustrated through basic "prisoner’s dilemma" games, where trade benefits and potential sanctions are the primary considerations for countries in the global community.
Coase Theorem
The Coase Theorem is generally defined as follows
Well-defined property rights and the ability for parties to make payments enable consideration of externalities, leading to optimal outcomes When affected parties can negotiate without costs, an efficient result is achieved regardless of how legal responsibility for damages is assigned Ultimately, the party receiving the rights benefits, while society as a whole achieves the best possible outcome.
The Coase theorem highlights that market equilibrium can be achieved for various goods, including environmental resources, provided that property rights are clearly defined However, under international law, establishing these property rights can often be challenging, which may hinder the effective functioning of a market economy.
International agreements are essential to address collective action problems by establishing a legal framework that all member countries must follow To ensure compliance, economic sanctions or other punitive measures can be implemented, facilitating the effective functioning of these agreements.
The Coase Theorem faces challenges in real market economies due to its assumption of zero transaction costs in achieving efficient equilibrium among players with well-defined property rights In practice, even with proper property rights, identifying them and reaching consensus is often difficult, leading to busy courts and legal costs that can exceed the benefits of winning cases Internationally, transaction costs are typically higher due to varying laws across countries, which can prevent equilibrium in the global market Therefore, international agreements must clearly define property rights related to environmental goods, but this is just the initial step Reducing transaction costs to a manageable level for all parties is crucial, achievable through mechanisms that can settle disputes beyond the sovereign rights of member countries Currently, the World Trade Organization (WTO) is the only entity equipped with such a mechanism.
Game Theory
Game theory, a branch of applied mathematics, utilizes models to analyze interactions governed by formalized incentive structures, known as "games." This field has diverse applications across economics, international relations, biology, political science, and military strategy It focuses on predicting and understanding individual behaviors in games and identifying optimal strategies Interestingly, various interactions that appear distinct can share similar incentive structures, thereby representing a common game framework.
The most well-known and basic game theory is called the prisoners‟ dilemma
In this game, players' rational and profit-driven actions often lead to disastrous outcomes for everyone involved, highlighting the environmental values entangled in a prisoners' dilemma Understanding the mechanisms of game theory is crucial for addressing environmental goods, as it can help prevent their depletion in the competitive international free market.
Advanced game theory, specifically cooperative game theory, plays a crucial role in the conservation of environmental goods through enforceable contracts This approach offers a framework for creating plausible contracts, essential for achieving sustainable equilibrium in international markets for environmental goods The thesis aims to explore whether an international agreement can establish conditions that facilitate such contracts among market players, ultimately promoting environmental sustainability.
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 for the global community can significantly reduce damage levels from d1 to d2 However, in the international arena, country A retains the sovereign authority to choose d1 as its most economically advantageous level, allowing it to dictate 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 among participants before they make individual decisions In Box 1.1, the bottom right represents the outcome achieved without an international agreement, while the top left illustrates the result obtained when an international agreement is in place.
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 negatively impact their economies Conversely, the source country views the costs of damage reduction as higher, since addressing the root causes of environmental harm could adversely affect its domestic industries.
1.5 Other economic concepts and theories
Economic concepts such as opportunity cost, monopolistic markets, and elasticity of substitution are crucial for analyzing international organizations' strategies for protecting natural environmental resources Understanding the opportunity cost of common-pool resources (CPRs) consumption is essential to assess their true value Additionally, recognizing the mechanisms of production cartels, similar to OPEC, is vital, as commodity agreements often promote such structures to sustain profitable international prices for producing countries.
To effectively manage the price of a natural resource, it is crucial for international organizations to understand the price elasticity of substitution, which assesses how price changes in substitute products affect those derived from the natural resource This understanding is essential in the context of monopolistic market theory and its implications for international regulation.
Introducing price intervention measures, such as quota allocation, in a natural resource market can significantly impact market dynamics According to the general theory of monopolistic markets, these interventions can lead to altered supply and demand balances, potentially resulting in higher prices and reduced availability of the resource Consequently, such measures may create inefficiencies, limit competition, and affect consumer access, ultimately reshaping the market landscape.
Figure 1.9 demonstrates the market equilibrium level (E) compared to the monopolistically set production level (M), revealing that monopolistic production is lower than market-oriented production This reduction allows for resource conservation through monopolistic measures Additionally, the monopolistic price exceeds the market price, enabling producers to achieve adequate revenue despite the decrease in production levels.
Production restrictive measures can lead to significant issues, particularly the risk of chiseling among member countries Producers may be tempted to exceed their quota allocations since the desired production level at price P2 is Q3 If multiple countries attempt to boost their output beyond these limits, it could severely impact their resource assets Ultimately, if all countries pursue additional revenue by selling at price P2, the resulting production level would reach Q3, which is substantially higher than what would occur in a free market scenario.
Hence, for such production restrictive measures are to be successful, strict control over the producing member countries is imperative
Understanding the elasticity of substitution is crucial, as it influences the effectiveness of production restriction measures in monopolistic markets.
Figure 1.10 illustrates a scenario where the elasticity of substitution is high between an environmental product and its substitute Initially, the price ratio of the two products is P1:p, with the market trading Q1 units of the natural resource and q1 units of the substitute However, if the price of the natural resource increases due to intervention by an international organization, 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) favorably towards the substitute goods As a result, the market quantity of the natural resource declines significantly from Q1 to Q2, while the trade volume of the substitute products rises 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 how the aforementioned theories apply to the control mechanisms of international organizations 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 advocate for producing nations to share the responsibility of safeguarding the global environment.
Two unofficial estimates from private researchers highlight the financial needs for tropical forest conservation A 1992 study suggested that approximately 400 million US dollars annually is necessary, with a net requirement of 300 million dollars after accounting for 100 million dollars already in funding In contrast, another estimate indicates a higher need of 1.5 billion US dollars per year for effective conservation efforts.
Before applying economic theories to the data, it's essential to consider background figures on tropical forest depletion The annual depletion rate of tropical forests is 0.8%, while the plantation increase rate is about 0.2% from 1980 to 1990, resulting in a net depletion rate of approximately 0.6% Current and future production curves illustrate the relationship between tropical timber consumption and forest exploitation As long as the net depletion rate remains positive, the budget line will shift left of the sustainable boundary If the situation worsens, global tropical forests may fail to provide adequate resources.
10 The first research was made in 1992 by World Foundation for Environment and
The World Conservation Union (IUCN) conducted a significant study highlighting the importance of environmental services, particularly the carbon dioxide sink capacity, for the global community This research emphasizes that even with a net depletion rate reaching zero, the value of these ecological services remains crucial for sustainable development.
Figure 1.12: Current and Possible Future Budget Lines 11
Despite a reduction in the production curve, sustainable management remains achievable by enhancing the recognized value of the environment and consequently reducing consumption levels, as illustrated by the transition from point A to point B in the diagram.
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 demonstrates that achieving sustainable forest management by 2020 is unlikely if depletion rates continue to rise, although it remains feasible at the current rates 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 three scenarios regarding the future of tropical forests, highlighting that a positive annual net depletion rate ultimately leads to their complete destruction, likely 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 improvement in plantation rates, or both, as depicted in the Gradual Reduction curve in Figure 1.13.
The efforts required by the international community are largely determined by the sustainable boundary level If this level, denoted as S, is significantly lower than the threshold illustrated in Figure 1.13, it may take the global community many more years to achieve their sustainability goals.
To prevent the depletion of tropical forests, it is crucial to ensure that current stock levels are higher than before, regardless of the year By taking proactive measures, we can significantly increase the total area of tropical forests.
Figures 1.14 and 1.15 illustrate various scenarios regarding tropical forest sustainability Figure 1.14 depicts a situation where the international community aimed to maintain tropical forest levels at 2000's rate by the 2010 target, as outlined by ITTO in 2003 To achieve this goal, forest depletion needed to align with the S00 curve by 2010 However, this objective has become increasingly improbable as forest depletion continues unabated.
Figure 1.15 depicts a scenario where the international community sets a sustainable level significantly higher than the S00 level, primarily due to concerns from consuming countries about the over-exploitation of tropical forests by 2000 To achieve this, the depletion rate of tropical forests would need to turn negative, raising the depletion curve to the Sh level illustrated in the figure However, this goal became nearly unattainable by 2000, leading some countries to advocate 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
Between 2000 and 2010, the marginal cost associated with increased quantity, represented as ΔC/ΔQ, was significantly higher in Figure 1.15 compared to Figure 1.14 This discrepancy serves as a key factor influencing the variations 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, contrasting with traditional marginal damage functions that focus solely on interactions among individual nations The current forest depletion level is represented at the intersection point d1, with a cost of 100 million US dollars to maintain this depletion However, if the global community aims for a sustainable level of forest exploitation at point S, an annual contribution of 400 million US dollars would be necessary This shift requires an upward adjustment of MDp to MDg, indicating that consuming countries must contribute an additional 300 million US dollars to achieve sustainability.
Figure 1.17 shows the case that 1.5 billion US dollars are required to achieve
To achieve the 2010 target for reducing forest depletion to level S, a significant shift in the MDG curve is essential This effort 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) shifts downward to reach level S, necessitating producing countries to implement measures or provide funding to ease the burden on consuming countries According to the Coase theorem, if consuming countries are granted property rights to influence environmental quality, this scenario becomes feasible However, in practice, producing countries retain sovereign control over their natural resources, as illustrated in Figure 1.16, where property rights are allocated to producing countries 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 faces challenges as consumers may resist such financial contributions, especially if the compensation amounts are perceived as excessively high Moreover, it is crucial to recognize that responsibility for conservation should be shared between consumers and producing countries While this compensation strategy can aid in resource conservation, it may not provide a stable long-term solution.
Producers cannot realistically bear all responsibilities for conservation measures, as they are unlikely to relinquish their rights and often lack the necessary funds to implement these initiatives independently Therefore, they require adequate support 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, it's crucial that producers acknowledge at least half the environmental value that consuming countries do In scenarios where non-transfer conditions exist, producers may not differentiate between contribution and non-contribution solutions If producers align their values with those of consumers, the Fund's success becomes attainable.
The successful implementation of penalty clauses in the fund's rules and regulations is crucial for its success, as it ensures accountability regardless of producers' acknowledgment of environmental values However, achieving consensus between both parties on effective penalty clauses may pose significant challenges.
To ensure balanced values for both parties, it is essential to engage in regular consultations and information exchanges When both sides share information and understand each other's perspectives, they can align on environmental values, allowing the fund to thrive without relying on penalty clauses.
In summary, the most effective approach involves implementing penalty measures alongside a non-transfer of funds as compensation However, the acceptance of penalty measures relies on both parties sharing the same environmental values Consequently, the success and stability of the Fund are enhanced when both producers and consumers align on these values.
To foster mutual understanding, it is essential for both producing and consuming countries to recognize shared environmental values International organizations should facilitate effective consultations between these groups to ensure alignment on environmental priorities.
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 Although these non-cash contributions may reduce the potential economic benefits from resource utilization, they are effectively equivalent to cash contributions to the fund.