Classic Papers in Natural Resource Economics
Also by Chennat Gopalakrishnan NATURAL RESOURCES AND ENERGY: Theory and Policy THE EMERGING MARINE ECONOMY OF THE PACIFIC THE ECONOMICS OF ENERGY IN AGRICULTURE
Classic Papers in Natural Resource Economics Edited by Chennat Gopalakrishnan Professor University of Hawaii at Manoa Honolulu Hawaii
First published in Great Britain 2000 by MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 6XS and London Companies and representatives throughout the world A catalogue record for this book is available from the British Library. ISBN 978-1-349-41750-6 ISBN 978-0-230-52321-0 (ebook) DOI 10.1057/9780230523210 First published in the United States of America 2000 by ST. MARTIN S PRESS, INC., Scholarly and Reference Division, 175 Fifth Avenue, New York, N.Y. 10010 Library of Congress Cataloging-in-Publication Data Classic papers in natural resource economics / edited by Chennat Gopalakrishnan. p. cm. Includes bibliographical references and index. 1. Natural resources. 2. Environmental policy. 3. Externalities (Economics) I. Gopalakrishnan, Chennat HC59.C574 2000 333.7 dc21 99 048233 Editorial matter and selection Chennat Gopalakrishnan 2000 Chapter 1 The Economic Journal 1960 Chapters 2, 3, 8, 12 and 13 American Economic Association 1970, 1974, 1968, 1967, 1968 Chapter 4 MIT Press, 1974 Chapter 5 Journal of Law and Economics 1960 Chapters 6, 7 and 10 Basil Blackwell Ltd 1962 Chapters 9 and 11 University of Chicago Press 1954, 1931 Chapter 14 Oxford University Press 1971 Softcover reprint of the hardcover 1st edition 2000 978-0-333-77763-3 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1P 0LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. 10 9 8 7 6 5 4 3 2 1 09 08 07 06 05 04 03 02 01 00
Contents Preface Acknowledgments List of Contributors vii ix xi Classic Papers in Natural Resource Economics: 1 An Overview Chennat Gopalakrishnan I The Intertemporal Problem 11 1 The Social Time Preference Discount Rate in Cost Benefit Analysis 13 Martin S. Feldstein 2 On the Social Rate of Discount 37 William F. Baumol 3 Uncertainty and the Evaluation of Public Investment Decisions 54 Kenneth J. Arrow and Robert C. Lind 4 Environment Preservation, Uncertainty, and Irreversibility 76 Kenneth J. Arrow and Anthony C. Fisher II Externalities and Market Failure 85 5 The Problem of Social Cost 87 Ronald H. Coase 6 Externality 138 James M. Buchanan and William C. Stubblebine 7 On Divergences between Social Cost and Private Cost 155 Ralph Turvey v
vi Contents III Property Rights, Institutions and Public Choice 161 8 Toward a Theory of Property Rights 163 Harold Demsetz 9 The Economic Theory of a Common-Property Resource: The Fishery 178 H. Scott Gordon 10 Politics, Policy, and the Pigovian Margins 204 James M. Buchanan IV The Economics of Exhaustible Resources 219 11 The Economics of Exhaustible Resources 221 Harold Hotelling 12 The Economics of Resources or the Resources of Economics 257 Robert M. Solow V The Economics of Renewable Resources 277 13 Economics of Production from Natural Resources 279 Vernon L. Smith 14 Economics of Forestry in an Evolving Society 304 Paul A. Samuelson Further Readings 334 Author Index 339 Subject Index 342
Preface The role of natural resources in the context of sustainable economic development, both at the micro and macro levels, has in recent years begun to engage the serious attention of academics, policymakers, planners, and even laymen. This increased interest is largely the result of looming threats in the quantity and quality of natural resources and their potential human and environmental impacts. One of the consequences of this steadily rising concern is a resurgence of interest in natural resource economics as a major area of academic inquiry within the broad field of economics. This renewed interest has aroused the curiosity of a large number of individuals, both in academia and elsewhere, in the intellectual history of natural resource economics. The present volume is a modest effort to meet this growing fascination with the early beginnings of the field. This book brings together in a single volume a choice selection of key classics in the field of natural resource economics. The 14 papers included in this book are grouped into five parts: the intertemporal problem; externalities and market failure; property rights, institutions and public choice; the economics of exhaustible resources; and the economics of renewable resources. The papers span many facets of the discipline and give the reader informed insights into the complex issues involved in resource production, pricing, consumption, and allocation. Written by distinguished resource economists, among them five Nobelists, the papers in this volume probe, analyze, and illuminate the central issues in the discipline. This volume is primarily aimed at an academic audience. Specifically, it is intended as a supplementary textbook for graduate and/or advanced undergraduate courses in natural resource economics. Mindful of the time constraints under which professors and students operate, the book has limited the number of papers to fit a one-semester or even a onequarter course. The papers present an appealing mix of conceptual, empirical, and quantitative analyses. A concise overview of each of the 14 papers is given in the editor s Introduction. Further Readings at the end of the book provide a list of 75 titles selected by the editor to help readers further explore topics discussed in this volume. This book could also be of use to researchers, policy analysts, and others with a good vii
viii Preface grounding in economic theory and some knowledge of quantitative methods. Many people have contributed directly or indirectly to the preparation of this book. Although it is not possible to acknowledge everyone who has assisted, I am grateful to all. A few, however, deserve special mention. I owe a special debt of gratitude to my publisher, Macmillan, for accepting my book proposal. To Sunder Katwala, who commissioned this volume, Alison Howson, who was most helpful throughout the completion of this book, and to Linda Auld, for her meticulous copyediting, I offer my sincere thanks. Special appreciation goes to my daughter Shalini who prepared the Author Index for this volume. I am grateful to Frank S. Scott, Jr. and Linda Cox, my colleagues here at the University of Hawaii, for their support of my work over the years. I am also beholden to Eric Im, also of the University of Hawaii, who helped me with the renumbering of the equations in Chapters 9, 13 and 14. To my former graduate students, Prahlad Kasturi, Hossein Khaleghi, and Parashar Malla, all good friends now, I extend my thanks for cheering me on all these years. My student assistants, Andrew Nishida and Cynthia Tavares, deserve special mention for their exemplary assistance with word processing and assorted other tasks involved in preparing the manuscript for the publisher. As always, I am deeply indebted to my wife Malini and my daughter Shalini, without whose understanding and support this book would not have materialized. Chennat Gopalakrishnan
Acknowledgments The editor and publishers acknowledge with thanks the authors and publishers listed below for granting permission to use copyright material. The Economic Journal for article: Martin S. Feldstein (1964), The Social Time Preference Discount Rate in Cost Benefit Analysis, Economic Journal, 74: 360 79. American Economic Association for articles: Kenneth J. Arrow and Robert C. Lind (1970), Uncertainty and the Evaluation of Public Investment Decisions, American Economic Review, 60: 364 78; Robert M. Solow (1974), The Economics of Resources or the Resources of Economics, American Economic Review, 64: 1 15; William F. Baumol (1968), On the Social Rate of Discount, American Economic Review, 57: 347 59; Harold Demsetz (1967), American Economic Review, 57: 347 59; Vernon L. Smith (1968), Economics of Production from Natural Resources, American Economic Review, 58: 409 32. Basil Blackwell, Ltd. for articles: James M. Buchanan and W. C. Stubblebine (1962), Externality, Economica, 29: 371 84; James M. Buchanan (1962), Politics, Policy and the Pigovian Margins, Economica, 29: 17 28; Ralph Turvey (1963), On Divergence Between Social Cost and Private Cost, Economica, 30: 309 13. University of Chicago Press for articles: Harold M. Hotelling (1931), The Economics of Exhaustible Resources, Journal of Political Economy, 39: 137 75; H. Scott Gordon (1954), The Economic Theory of a Common Property Resource: The Fishery, Journal of Political Economy, 62: 124 42. Journal of Law & Economics for article: Ronald H. Coase (1960), The Problem of Social Cost, Journal of Law & Economics, 3: 1 44. MIT Press Journals for article: Kenneth J. Arrow and Anthony C. Fisher (1974), Environmental Preserix
x Acknowledgments vation, Uncertainty and Irreversibility, Quarterly Journal of Economics, 88: 312 19. Oxford University Press for article: Paul A. Samuelson (1976), Economics of Forestry in an Evolving Society, Economic Inquiry, 14: 466 92.
List of Contributors Kenneth J. Arrow, Stanford University. William F. Baumol, New York University. James M. Buchanan, George Mason University. Ronald H. Coase, Professor Emeritus, University of Chicago. Harold Demsetz, University of California, Los Angeles. Martin S. Feldstein, National Bureau of Economic Research. Anthony C. Fisher, University of California, Berkeley. H. Scott Gordon, Professor Emeritus, Indiana University. Harold Hotelling (deceased), (formerly with) Stanford University. Robert C. Lind, Cornell University. Paul A. Samuelson, Massachusetts Institute of Technology. Vernon L. Smith, University of Arizona. Robert M. Solow, Massachusetts Institute of Technology. William C. Stubblebine, Claremont McKenna College. Ralph Turvey, (formerly with) International Labour Organization. xi