VII.9 Ecological Economics: Principles of Economic Policy Design for Ecosystem Management
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VII.9 Ecological Economics: Principles of Economic Policy Design for Ecosystem Management Anastasios Xepapadeas OUTLINE 1. Introduction 2. Ecological modeling and resource dynamics 3. Economic modeling for ecosystem management 4. Instruments of economic policy and policy design Ecological economics studies the interactions and coevolution in time and space between ecosystems and human economies. The rate at which humans exploit or harvest ecosystems services exceeds what might be regarded as a desirable level from society’s point of view. The consequences of this overexploitation are well known (e.g., climate change, biodiversity loss and extinction of species, collapse of fisheries, overexploitation of water resources). The objective of designing economic policy is to develop a system of regulatory instruments so that the state of the regulated ecosystems will converge toward the socially desirable outcome. The purpose of this chapter is to present an approach describing how economic policies might be designed to achieve this objective. GLOSSARY control variable. A variable whose values can be chosen by a decision maker in order to affect the path of the state variables. ecological economics. The study of the interactions and coevolution in time and space between ecosystems and human economies. economic policy. The intervention by a regulator through policy instruments in private markets so that a desired market outcome is attained. externality. An externality is present when the wellbeing (utility) of an individual or the production possibilities of a firm are directly affected by the actions of another agent in the economy. internalization of an externality. A situation in which the agent who generates the externality bears the cost that the externality imposes on other agents. market failure. A market failure exists when competitive markets fail to attain Pareto optimum. Pareto optimum. A situation in which it is not possible to make someone better off without making someone else worse off. production function. A real-valued function that shows the maximum amount of output that can be produced for any given combination of inputs. public good. A commodity for which use of one unit of the good by one agent does not preclude its use by other agents. state variable. A variable that characterizes the state of a system at any point in time and space. utility function. A real-valued function that shows that if a consumer prefers the bundle of goods x to the bundle of goods y, then the utility of x is greater than the utility of y. 1. INTRODUCTION Ecological economics studies the interactions and coevolution in time and space between ecosystems and human economies. Human economies in the process of their operation and development use the flows of services generated by ecosystems. In using these services, humans make decisions about the size and the time profile of the harvested flows of ecosystems services as well as about the growth rates of different types of natural capital that are embedded in the ecosystems and that generate the flows of desirable services. Long series of empirical observations have established that, given the institutional structure of the economies (e.g., markets, allocation of property rights, regulatory authorities , international agreements), the rate at which economic agents exploit (or harvest) ecosystems services exceeds what might be regarded as a desirable level from society’s point of view. The consequences of this overexploitation are well known and include serious interrelated environmental problems such as climate change, biodiversity loss and extinction of species , collapse of fisheries, and overexploitation of water resources. To put this point differently, the market outcome, or the outcome stemming from individual actions, regarding the harvesting of ecosystem services and the time paths of the stocks of natural capital (or natural resources) is different from an outcome (or a state) that is socially desirable. The challenge of designing economic policy in this context is to develop a system of regulatory instruments or incentive schemes that will affect the behavior of economic agents (individuals, firms, nations ) regarding the harvesting of ecosystem services in such a way that harvesting rates and time paths of the stock of natural capital under the economic policy will converge toward the socially desirable outcome. The purpose of this chapter is to present an approach describing how these economic policies might be designed. 2. ECOLOGICAL MODELING AND RESOURCE DYNAMICS The building of meaningful ecological–economic models capable of helping in the design of policies for ecosystem management requires the development of two interacting modules: an ecological module describing the evolution of the state of the ecosystem and the ways...


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