Economics of Evironmental Conservation, Second Edition pdf

Economics of Evironmental Conservation,
Second Edition
Economics of
Environmental
Conservation, Second
Edition
Clement A. Tisdell
Professor of Economics, School of Economics, The University
of Queensland, Australia
Edward Elgar
Cheltenham, UK • Northampton, MA, USA
© Clement A. Tisdell 2005
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system or transmitted in any form or by any means, electronic,
mechanical or photocopying, recording, or otherwise without the prior
permission of the publisher.
Published by
Edward Elgar Publishing Limited
Glensanda House
Montpellier Parade
Cheltenham
Glos GL50 1UA
UK
Edward Elgar Publishing, Inc.
136 West Street
Suite 202
Northampton
Massachusetts 01060
USA
A catalogue record for this book

is available from the British Library
ISBN 1 84376 614 0 (cased)
Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall
Contents
List of figures x
List of tables xv
Preface to the second edition xvi
Preface to the first edition xviii
1. Economics and the living environment 1
1.1 Introduction 1
1.2 Welfare economics, environment and the biosphere 2
1.3 Ethics, values and environmental economics:
alternative views 7
1.4 Economic growth, dynamics, uncertainty and the
environment: differing views 12
1.5 Uncertainty, welfare and environmental issues 19
1.6 Conclusion 20
2. Global conservation strategies and concerns 25
2.1 Introduction 25
2.2 A classification of conservation policies 26
2.3 The World Conservation Strategy and Caring for the
Earth: origins, aims and basic principles 30
2.4 Ecological processes and life-support systems:
agriculture, forests, marine and freshwater systems 33
2.5 Preservation of genetic diversity 38
2.6 Sustainable utilisation of species and ecosystems 41
2.7 Significant differences between Caring for the Earth
and the World Conservation Strategy 44
2.8 International conservation concerns and priorities 47
2.9 Concluding comments 49

3. Markets and government intervention in environmental
conservation 52
3.1 Introduction – choices about resource use and
conservation 52
3.2 Market efficiency and externalities 56
3.3 Government policies ‘to correct’ for externalities 65
v
3.4 Public or collective good characteristics associated
with the conservation of nature 70
3.5 Option demands, transaction costs, more on existence
values, bequest, irreversibility and uncertainty 73
3.6 Discount rates as grounds for government intervention 75
3.7 Monopolies and conservation 76
3.8 Common-property and intervention 78
3.9 Failure of political and administrative mechanisms in
relation to conservation 79
3.10 Concluding comment 81
4. Environmental conservation in developing countries 84
4.1 Introduction 84
4.2 Basic conservation problems in the Third World: origin 85
4.3 Population growth and income aspirations 86
4.4 Expansion of the market system 88
4.5 New technology 89
4.6 Problems illustrated by some cases 90
4.7 High effective rates of discount 93
4.8 Difficulties in enforcing conservation measures and
questions of social structure 94
4.9 Policies for influencing and improving conservation
practices in the Third World 95
4.10 Provision of information and education 96

4.11 Appropriating greater gains nationally from
conservation 96
4.12 Tourism as a means of appropriating gains from
conservation 98
4.13 Improving the distribution of gains from conservation
within LDCs 99
4.14 International aid and assistance, loans and trade 101
4.15 Global public good/externality considerations 103
4.16 Concluding observations on conservation in LDCs 105
5. Preservation of wildlife and genetic diversity 109
5.1 Introduction 109
5.2 Total economic value and the valuation of wildlife and
biodiversity 110
5.3 Managing wildlife as a mixed good: simple analytics 113
5.4 Some economic consequences of interdependence
between species 118
5.5 Criteria for deciding on species to save from extinction 121
vi Economics of environmental conservation
5.6 Property rights in genetic material, GMOs, and the
conservation of biodiversity 126
5.7 Globalisation, market extension and genetic diversity
of domesticated animals and plants 128
5.8 Concluding comments 129
6. Open-access, common-property and natural resource
management 132
6.1 Types of property and general consequences 132
6.2 Open-access: economic failures and their consequences 135
6.3 Policies for managing open-access resources 140
6.4 Further discussion of features of open-access to
resources and its regulation 143

6.5 Ranching and farming as means to overcome open-
access problems and conserve species 146
6.6 Concluding comment 150
7. Economics of conserving natural areas and valuation techniques 153
7.1 Introduction: nature and availability of natural areas 153
7.2 Benefits and uses of natural protected areas 155
7.3 An overview of approaches to estimating the
economic value of non-marketed commodities 156
7.4 Travel cost method of estimating the value of a
natural area 158
7.5 Contingent valuation of natural areas 163
7.6 Hedonic price valuation of natural areas 167
7.7 Some additional economic valuation techniques 169
7.8 Using total economic values for social choices about
resource use 169
7.9 Back to some fundamentals of economic valuation 171
7.10 Government versus non-government provision of
natural areas 173
7.11 Concluding comments 175
8. Forestry, trees and conservation 179
8.1 Introduction: forest cover and uses 179
8.2 Commercial forestry for timber production 181
8.3 Multiple purpose management of forests 186
8.4 Forests and trees in less developed countries 188
8.5 Economic policies, pollution, forests and trees 192
8.6 Forest plantations versus natural forests: a discussion 195
8.7 Concluding remarks 196
Contents vii
9. Agriculture and the environment 199
9.1 Introduction 199

9.2 Externalities and agriculture 200
9.2.1 Agricultural externalities on agriculture 200
9.2.2 Agricultural spillovers on non-agricultural
sectors and interests 206
9.2.3 Spillovers from other sectors on agriculture 207
9.3 Sustainability of agricultural systems 208
9.4 The Green Revolution, organic agriculture,
permaculture 211
9.5 Pest and disease control in agriculture 216
9.6 Agriculture, biodiversity, trees and wildlife
conservation 218
9.7 Genetically modified organisms in agriculture:
economic and biodiversity issues 220
9.8 Concluding observations 222
10. Tourism, outdoor recreation and the natural environment 225
10.1 Introductory issues, dependence of tourism on the
natural environment 225
10.2 Tourism destroys tourism and tourist assets 226
10.2.1 Congestion or crowding and tourism 227
10.2.2 Destruction of tourism resources by visitors 229
10.3 Tourism area cycle and more on the dynamics of
tourism 231
10.4 Impact of pollution and environmental damage on
tourism and benefits from pollution control 234
10.5 Tourism, conservation and the total economic value
of a natural area and economic impact analysis 237
10.6 Sustainability, ecotourism and economics 239
10.7 Conflicts between tourists, variety in tourist areas,
public finance issues and national gains 240
10.8 Concluding observations 241

11. Sustainable development and conservation 243
11.1 Background 243
11.2 Sustaining intergenerational economic welfare 244
11.3 Capital, natural resource conversion and human
welfare: further considerations 248
11.4 Survival of the human species for as long as possible 251
11.5 Issues raised by the views of Daly and Georgescu-
Roegen about sustainability 253
viii Economics of environmental conservation
11.6 Resilience of production and economic systems and
stationarity of their attributes 256
11.7 Cost–benefit analysis and sustainability 258
11.8 Sustainability of community 260
11.9 Sustaining biodiversity 261
11.10 Concluding remarks 263
12. Population, economic growth, globalisation and conservation: a
concluding perspective 267
12.1 Introduction 267
12.2 Global population levels: characteristics and
projections 268
12.3 Environmental consequences of population growth
and economic demands 269
12.4 Environmental Kuznets curves: do they provide
grounds for environmental optimism? 270
12.5 Is economic globalisation favourable or unfavourable
to environmental conservation? 273
12.6 Concluding observations 274
Index 277
Contents ix
Figures

1.1 Choice and trade-off between supply of man-made goods
and those provided by the natural environment 5
1.2 Choosing between goods provided by the natural
environment and man-made goods subject to constraints or
minimum ‘standards’ 7
1.3 Ricardian model of limits to economic growth emphasising
importance of population levels and of technological
change 13
2.1 Difference in constrained optimum for welfare maximisation
(in relation to conservation and development) which pay no
attention to differences in absolute welfare 28
3.1 In the absence of environmental spillovers, competitive
markets result in supplies of private goods that efficiently
satisfy human wants 57
3.2 When unfavourable environmental spillovers occur, market
systems usually result in excessive environmental damage
from a social economic viewpoint 58
3.3 An illustration of some situations in which public
intervention may be required on economic grounds to
reduce or eliminate an environmental spillover, even though
the externality is infra-marginal 59
3.4 Illustration of divergence between social and private
marginal cost due to externalities or spillovers and
consequent social ‘deadweight’ losses 61
3.5 Private net benefit gained by land clearing compared with
various social net benefit curves with differing implications
for the optimality of the extent of private land clearing 62
3.6 Pursuance of private gain may result in too much natural
vegetated land being developed for commercial purposes.
This is so if favourable externalities arise from natural

vegetation cover and a social viewpoint is adopted 64
3.7 The optimal level of conservation of the population of a
species considered as a pure public good on the basis of its
existence value 71
3.8 In the above case, the higher is the rate of interest used for
x
discounting the more likely development is to be preferred to
conservation of a natural resource 76
3.9 Monopoly in this case has no conservation advantages and
results in a deadweight social loss 77
3.10 Illustration of how majority voting may lead to insufficient
or too much conservation judged by the Kaldor-Hicks
economic efficiency test 80
4.1 Conservation of living natural resources in a developing
country to some extent provides a global public good.
Hence, an optimal amount of conservation may not occur in
developing countries if LDCs follow their own self-interest 103
5.1 Species of wildlife sometimes provide a mixed good. In such
cases, private harvesting of species to supply private goods is
unlikely to maximise economic welfare because the social
marginal cost of harvesting diverges from the private
marginal cost of harvesting the species 114
5.2 The mere fact that the private cost of harvesting a species
diverges from the social cost of harvesting it does not imply
that its level of harvest is always socially inappropriate or
suboptimal 115
5.3 The social marginal cost of harvesting a species may be so
high that no harvesting is socially optimal. In such cases, all
private harvesting is inappropriate 116
5.4 A wildlife species may be regarded as a pest by some social

groups and as an asset by others. Using the Kaldor-Hicks
criterion, the level of harvesting of the species can be
adjusted to take this into account 117
5.5 The socially optimal combination of populations of
interdependent species may differ from their natural
combination and encourage human intervention to change
the population mix 119
5.6 Strengthening of the global property rights of individual
nations in their genetic material may provide an incentive to
conserve this material 127
6.1 Open-access results in resources being allocated in
accordance with the value of their average product rather
than the value of their marginal product and this leads to a
deadweight social loss indicated here by the hatched triangle 136
6.2 Backward-bending supply curve for the harvest of species to
which there is open-access. This can result in perverse
conservation decisions and a smaller population of the species
than is desirable for minimising the cost of the actual harvest 138
Figures xi
6.3 Sustainable harvesting levels as a function of the level of
population of a species 139
6.4 In an open-access industry, technological progress which
reduces per unit harvesting costs might reduce economic
welfare and threaten the existence of a species 139
6.5 Taxes on the catch or tradeable permits may be used to
improve allocative efficiency in the case of an open-access
resource. But if economic gains are to be made, the cost of
administering such schemes must not exceed the benefits
otherwise obtained 141
6.6 As the demand for a renewable harvested resource, to which

there is open-access, rises, the social economic costs of its
‘excess’ harvesting increases. In addition, the stock of the
resource declines and as shown by Figures 6.2 and 6.3, the
resource faces increasing risk of extinction as a result of
overharvesting 144
6.7 While farming may favour the conservation of wild stock of a
species, it is not bound to do so. This is because it can increase
demand for the use of the species and it may cause the supply
schedule of supplies from the wild of the harvested species to
move upward and to the left (note that this shift in the
supply schedule is not illustrated) 148
6.8 Farming has altered the global genetic stock. It has resulted
in losses as well as additions to the stock 150
7.1 Zoning of areas depending upon travel distance to an
outdoor attraction A 159
7.2 Relative frequency of visits (demand for visits per capita) as a
function of the (travel) cost per visit 160
7.3 Demand curve for visits to an outdoor area. Consumers’
surplus in the absence of an entry fee is shown by the
hatched area 161
7.4 Evaluation of alternative land-use taking account of total
economic values 170
7.5 Marginal evaluation curves of conservationists and developers
in relation to the percentage of natural area developed 172
7.6 Under provision of public goods (protected areas in this case)
leaves scope for their provision by non-governmental
organisations 174
8.1 Quantity of timber production available from a forest as a
function of its age 182
8.2 Determining the optimal growing period or harvest cycle for

a forest in order to maximise its economic sustainable yield 184
xii Economics of environmental conservation
8.3 The economics of mixed land-use (multiple purpose use of
forested land) depends only partially on biological production
possibilities. But if the production transformation curve is of
the form of KLMN, economic efficiency requires mixed
production and mixed land-use 187
8.4 Solutions to transboundary or transfrontier pollution, such
as air pollution causing acid rain, are difficult to achieve. The
polluter may either pay to pollute or be paid not to pollute.
The Kaldor-Hicks solution can be achieved by either policy
but the income distributional consequences are different 193
9.1 A case in which activities by one group of agriculturalists has
negative spillovers on another group of agriculturalists 202
9.2 Economic loss resulting from negative spillover on
downstream agriculturalists of water use by upstream
agriculturalists 203
9.3 Free access to water from an (underground) water basin can
result in inefficient reduction in the availability of the
resource 205
9.4 Two agricultural systems with different degrees of
sustainability 209
9.5 Sustainability or otherwise of agricultural systems from a
different point of view to that considered in Figure 9.4 210
9.6 When chemical agricultural systems are adopted agricultural
yields or returns become very dependent on them. Withdrawal
of chemicals results initially in marked depression of these
yields or returns. So agriculture tends to become locked into
such systems once they are adopted 214
9.7 Illustration of how the introduction of GM crops could lead

to a net loss in social economic welfare 221
10.1 A case in which the number of tourist visits to an area is
influenced by aversion to crowding 227
10.2 As the cost of visiting a tourist area declines, consumers’
(tourists’) surplus may not increase but decrease. This can
occur if there is aversion to crowding because lower costs of
a visit will usually bring more visitors 228
10.3 Consequences for tourism demand of deterioration of a
tourist asset due to tourist visits 230
10.4 Typical tourism area cycle according to Butler (1980) 232
10.5 Tourism area cycle not caused by environmental damage due
to tourist loads 233
10.6 Illustrations of loss caused to the tourist industry and to
tourists by pollution 234
Figures xiii
10.7 A case in which pollution from sources outside the tourism
industry imposes external economic costs on tourism in terms
of losses in producers’ and consumers’ surpluses 235
10.8 A case in which defensive environmental expenditures (on pest
control) are economic because of their impact in increasing
tourism 236
10.9 Total economic value: economic conflict and non-conflict
zones between benefits from tourism and other economic
values 237
11.1 Dependence of human welfare on the ratio of man-made to
natural capital and implications for conversion and use of
natural capital 250
11.2 Hypothetical optimal path for maximising human welfare of
the ratio of man-made capital to natural capital 251
11.3 Some alternative views of the relationship between population

levels, economic activity levels and the length of existence of
the human species 252
11.4 Alternative sustainable economic solutions depend on
objectives which in turn depend on ethics 255
11.5 Two production or economic systems with different degrees
of sustainabilty 258
12.1 Environmental Kuznets curves are widely believed to be
typically of the form shown. They are often used to support
the view that economic growth will eventually result in
environmental improvement and a sustainable future 272
xiv Economics of environmental conservation
Tables
2.1 Production of combinations of ‘natural’ (environmental)
output and wheat on two grades of land for two alternative
allocations of land: an example of comparative advantage 37
3.1 Four different situations involving excludability (private
property rights) and rivalry in use of a commodity.
Combinations of these factors influence whether markets
can exist and whether they can satisfy human wants
efficiently 54
5.1 Main sources of value of conserving wildlife with examples
and explanations 111
5.2 Components of total economic value of wildlife along the
lines suggested by Pearce et al. (1989) 112
5.3 Ciriacy-Wantrup/Bishop type of matrix for determining the
desirability of saving a species from extinction 124
11.1 A list of different sustainability objectives 263
xv
Preface to the second edition
Over the years, I have not lost my enthusiasm for ecological economics and

the conservation of nature. Therefore, I was delighted when Edward Elgar
told me that he would be interested in publishing a second edition of
Economics of Environmental Conservation and suggested a practical method
for producing the new manuscript. The first edition of the Economics of
Environmental Conservation was published in 1991 by Elsevier Science
Publishers. Even though fundamental environmental issues have not
changed since then, there have been many developments in ecological eco-
nomics and in policies affecting biological conservation and environmental
management.
Every chapter in the first edition has been revised, updated and in most
cases, slightly lengthened to accommodate new concepts and issues that
have evolved since the completion of the previous edition. For example,
coverage now includes a more comprehensive and integrated overview of
property rights as an element in conservation; more attention to the total
economic value concept; consideration of the implications of environmen-
tal Kuznets curves (the term had not been introduced in 1991); recently
highlighted limitations of economic techniques for environmental valua-
tion are included as well as some coverage of new valuation techniques,
such as choice modelling; there is more discussion of relationships between
tourism, conservation and economic environmental valuation; and in view
of growing globalisation, influences of globalisation on environmental
conservation and sustainability are explored. The multidisciplinary nature
of the work has been retained and presentation of ideas has been kept as
simple as possible in order to maintain accessibility.
The importance of studying relationships between economics and our eco-
logical and environmental circumstances has increased since the first edition
of this book was published. The volume of global production and the level
of the world’s population have risen considerably and have placed growing
demands on the Earth’s natural and environmental resources. This upward
trend is likely to continue for a few decades yet. Humankind is exerting more

influence than ever on existing patterns of biodiversity and the evolution of
life forms. Humans are doing this both indirectly by altering habitats, and
directly by genetic selection and the development of genetically modified
organisms. The latter aspects are given greater attention in this edition.
xvi
Revised and new material in this edition benefited indirectly from a
number of new, and sometimes not so new, contacts over the years that have
helped to retain my interest in this area. These include Ed Barbier, Jeff
Bennett, Andrew Dragun, Darwin and Jane Hall, Ulrich Hampicke, John
Hatch, Andreas Hohl, Kristin Jacobsson, Dale Squires, Irmi Seidl,
Timothy Swanson and Dayuan Xue. I also thank Dr Clevo Wilson for
encouraging me to work on this new edition and Hemanath Swarna
Nantha for suggesting and supplying some useful source materials for this
revision. Indirectly, the revision benefited as a result of an Australian
Research Council Grant for studying the economics of conserving
Australia’s tropical wildlife, joint investigations on the economics of con-
serving Asian elephants with Dr Ranjith Bandara of The University of
Colombo, and research with other doctoral students, joint research with Dr
Clevo Wilson and my lectures in ecological and environmental economics
to postgraduate and undergraduate students at The University of
Queensland.
I am especially grateful to Edward Elgar for supporting the publication
of my work and to the staff of Edward Elgar Publishing Limited for their
friendly and efficient approach to publishing my work and making it widely
available.
Typing required for the second edition has been done by Sue Hickey and
I am grateful for her help as well as the support by the School of Economics
at the University of Queensland. Once, again I thank my wife, Mariel, for
her support. She has almost become used to my habit of writing at home
in the early morning, even though she finds it a problem when she really

wants to chat.
Clement A. Tisdell,
Brisbane, Australia
Preface to the second edition xvii
Preface to the first edition
Study of the relationship between economic systems and ecological and
environmental ones is important for managing and conserving the
Biosphere on which all life, including that of humans, ultimately depends.
Fortunately, the importance of combining economic, ecological and envi-
ronmental studies is now increasingly recognised in policy circles world-
wide as, for example, is evident from the report of the United Nations’
World Commission on Environment and Development, Our Common
Future, Oxford University Press, New York, 1987, and from subsequent
international fora dealing with these matters. One might expect these rela-
tionships to be a central focus at the Second United Nations Conference on
the Environment and Development to be held in Rio de Janeiro in 1992.
But the more relationships between economics, ecology and the environ-
ment are studied, the more acutely one becomes aware of the fact that our
knowledge is imperfect, that many gaps remain to be filled and that we need
to convince more people to join in exploration and discovery in this area
because of the magnitude and importance of the task.
Of course, recognition is only the first step in dealing practically with an
issue or problem. The second step is to study, observe and analyse it and
develop relevant principles and from these, formulate an appropriate plan
of action. The final step, from a practical point of view, is to put the plan of
action or strategy into effect. In large, complex societies, such as modern
ones, in which individuals are highly specialised in their social functions and
activities, this requires co-operation or co-ordination between all groups in
society, and given the global nature of many environmental and ecological
effects of economic activity, it calls for international co-operation.

This book on environmental economics concentrates on the ecological
dimensions of the subject. It concentrates on living or biological resources
and their life-support systems. It considers the way in which economic
development and change affects these and the way in which these resources
can be better managed, or conserved to meet human objectives or aspira-
tions. But it does not ignore the possibility of non-anthropocentric objec-
tives. It also considers, in an economic context, the likelihood of Mankind
being able to respond effectively to ecological and environmental crises and
problems.
I hope that this book will be of interest, not just to economists, but to all
xviii
those interested in ecological and environmental issues. To that end, I have
written the book in a non-technical manner, preferring to concentrate on
basic issues, some of which raise awkward philosophical questions. A delib-
erate attempt has been made to keep ‘economic jargon’ to a minimum and
to explain economic terms used so as to make this material available to a
wider audience.
Most of the material in this book has been exposed in one form or
another to a wide range of audiences as part of lectures or seminars given
in Australia, China, Hungary, New Zealand, South Africa, United
Kingdom and the United States. I am grateful for the opportunities which
have been available to me in all these countries to develop and express my
ideas. Presentations have been given to both graduate and postgraduate
students, to government bodies, in academic seminars and at international
conferences. The number of individuals and organisations who should be
mentioned is large so I shall not catalogue them here. My thanks to all who
have helped in some way, no matter how small. However, I am especially
grateful to David Pearce and Peter Jackson for their encouragement when
I first floated with them the idea of a book along these lines (with an eco-
logical focus) during a visit to the United Kingdom several years ago, and

to Dr John Gowdy of Rensselaer Polytechnic Institute, Troy, New York
State for regularly urging me to complete the manuscript. Nicholas
Polunin has encouraged my interest in environmental conservation in
many ways and I value the support which has given me through his
journal, Environmental Conservation.I am grateful to Brian Wilson, Vice-
Chancellor of the University of Queensland, for thoughtfully supplying
me on his return from Helsinki with a copy of the WIDER paper men-
tioned in Chapter 12. I also benefited greatly from the comments of anon-
ymous reviewers (appointed by the publishers) on my introductory
chapters. It has also been valuable to be able to ‘try out’ some of the
material used in this book in lectures to environmental economics students
at the Universities of Newcastle and Queensland, as well as elsewhere.
Some of the material in Chapter 10, for example, was covered in lectures
to tourism management students at the Nankai University, China, and
MBA students at Queensland University.
While some of the research for this book was completed at the University
of Newcastle, New South Wales, with the financial assistance of a small
grant under the Australian Research Grants Scheme, practically the whole
of the manuscript was completed at the University of Queensland. I am
grateful to both institutions for their support. I wish to thank Jenny
Hargrave from the University of Newcastle for typing the first draft of the
initial chapters, and Deborah Ford of the University of Queensland for
typing the entire final manuscript, in the format required by Elsevier
Preface to the first edition xix
Science Publishers. I would like to acknowledge the kind and efficient assis-
tance of the staff of Elsevier in Amsterdam. Finally, but not least, I thank
my wife Mariel, and children, Anne-Marie and Christopher, for being sup-
portive once again.
Clement A. Tisdell,
Brisbane, Australia

xx Economics of environmental conservation
1. Economics and the living
environment
1.1 INTRODUCTION
Human welfare and continuing existence depends upon the living environ-
ment because, apart from anything else, other species are biologically essen-
tial for human existence, for example, via the food chain (Owen, 1975).
The presence of other living things influence human welfare, sometimes to
humankind’s benefit but at other times to its detriment, as with pests.
We depend on nature for continuing economic productivity, welfare and
ultimately existence. Biological resources should be taken into account in
socio-economic planning and evaluation of economic systems. Conversely,
economic analysis can be of value in helping to determine whether to
conserve or utilise living resources.
This is not to say that human welfare depends only on biological
resources but rather that it depends significantly upon these resources.
Furthermore, they may become of greater importance to humankind in the
future as non-renewable resources such as fossil fuels are depleted. As the
number of species in existencedeclines and the human populationincreases,
the value of remaining species to humankind is likely to rise substantially.
This book is principally concerned with the economics of conservation,
utilisation and management of natural biological resources. It deals with
economic factors that should be considered in devising policies for the con-
servation, utilisation and management of biological resources. Such factors
become increasingly important as our biological resources become scarcer
from an economic point of view. As stressed in the World Conservation
Strategy (IUCN-UNEP-WWF, 1980) and more recently in the Brundtland
Report, Our Common Future (World Commission on Environment and
Development, 1987), a strong case exists for biological conservation, even
on economic grounds alone. Economics is an important consideration in

biologically based activities such as wildlife conservation and use, pest
control, agriculture, forestry, fisheries and living marine resources, the
preservation and use of natural areas such as national parks and tourism
based on natural resources. In turn these activities have further environ-
mental consequences for humankind. For example, forests and tree cover
1
influence water quality, soil erosion and air quality. Indeed, economics is
relevant to the whole biosphere that is ‘The integrated living and life-
supporting system comprising the peripheral envelope of Planet Earth
together with its surrounding atmosphere so far down, and up, as any form
of life exists naturally’ (Friedman, 1985).
1.2 WELFARE ECONOMICS, ENVIRONMENT
AND THE BIOSPHERE
Economics is the science which studies the allocation of scarce resources in
society as a means to the satisfaction of human wants or desires. In order
to deal with the essential problem of economics, one has to take account of
available resources and methods of production of commodities, their
exchange and the way in which income is distributed. Economics, as it has
evolved, is essentially an anthropocentric (human-centred) subject.
Nevertheless, this does not mean that economics can not be supportive of
the conservation of the environment and in particular the biosphere.
Framers of the World Conservation Strategy (IUCN-UNEP-WWF, 1980)
and the World Commission on Environment and Development (1987)
were correct in believing that economics can provide significant arguments
in favour of conservation of biological resources. Conservation of envir-
onmental and biological resources is frequently required as a means of
maximising human welfare (or at least, avoiding inferior welfare outcomes)
in a world of limited resource availability. Let us therefore broadly consider
the relevance of alternative types of welfare economics to biological
conservation.

The major portion of the dominant theory of welfare economics is based
upon the view that the wants of individuals are to be satisfied to the
maximum extent possible by the allocation of resources. It is based, at least
in the West, upon the view that individual preferences are to count and that
human welfare is to be maximised subject either to existing property rights
of individuals or to an ideal distribution of property rights.
The foundations of Western welfare economics were laid by the
Utilitarian School. The Utilitarian School of economic thought believed
that each individual obtains utility or measurable satisfaction from his or
her consumption of commodities. It was argued that the use of society’s
resources should be such as to maximise the sum of utility obtained by
individuals. Therefore, given this view, since components of the biosphere
itself are used as inputs to produce commodities or to provide utility
directly to individuals, it follows that management of the biosphere should
be subject to the strategy of maximising the grand total of utility in society.
2 Economics of environmental conservation
Apart from other difficulties, the Utilitarian approach has foundered
because utility has not proven to be measurable objectively and compara-
bly between individuals.
This led to the substantial replacement of the Utilitarian approach to
welfare economics by an alternative approach, sometimes called New
Welfare Economics or Paretian Welfare economics after its chief propo-
nent Vilfredo Pareto (Little, 1957). This is also an individualistic approach
reliant on individual preferences but avoids interpersonal comparisons of
utility. It is based upon the view that an economic system or a system for
utilising resources should be efficient in satisfying human wants. Its basic
tenet is that welfare cannot be at a maximum if it is possible to make any
individual better off without making another worse off. Hence, a necessary
condition for a maximum of human welfare is that it be impossible to alter
the way in which society uses its resources to make any individual better off

without making another worse off. No matter what is the distribution of
property rights in society, the use of society’s resources including the bio-
sphere should be so organised (in the light of the production or transform-
ation possibilities open to humankind) that the welfare of no person can be
increased without reducing that of another person. Many neoclassical
economists argued that a system of perfect market competition would, with
a few minor exceptions, achieve this social ideal. However, as discussed in
later chapters, market mechanisms may fail significantly as means for
ensuring a Paretian optimal use of resources, especially of those resources
contained in the biosphere.
A rule closely related to Paretian optimality, is the notion of a Paretian
improvement. A Paretian improvement is said to occur when as a result of
a change in the use of resources some individuals are made better off
without anyone being made worse off. It is usually contended that any
change in resource-use which brings about a Paretian improvement is
socially desirable. In practice, however, few possible changes may have this
quality. It is more frequent for changes in resource-use to make some indi-
viduals worse off and others better off.For example, the acquisition of
private land for a natural park or restrictions on private land-use for envi-
ronmental reasons may damage the original landholders but benefit other
groups.
The notion of potential Paretian improvement (sometimes called the
Kaldor-Hicks criterion) was suggested as a means of dealing with this
problem. It suggests that if the gainers from a change in resource-use could
compensate the losers from it and remain better off than before the change,
the change should be regarded as an improvement. Note that actual
compensation need not be paid to the losers. If compensation is paid then
of course this criterion reduces to the Paretian criterion. The criterion of
Economics and the living environment 3
a potential Pareto improvement underlies much of social cost–benefit

analysis which itself has been applied to decision-making involving the
environment (Hufschmidt et al., 1983).
A difficulty with the Kaldor-Hicks criterion is that it may sanction a
change in resource-use which seriously worsens the distribution of income.
Cases have for example occurred in which land has been acquired for
national parks without compensation or adequate compensation to the
traditional users of the land who have sometimes been quite poor. In view
of the income distribution question, Little (1957) has proposed that a
potential Paretian improvement should only be unequivocally regarded as
a social gain if it does not worsen the distribution of income. If a potential
Pareto improvement is associated with a worsening of the distribution
of income, one has to consider whether this is sufficient to offset the net
benefits otherwise obtained.
While the above criteria (which can, for instance, be applied to piecemeal
decision-making involving the environment) have an individualistic basis,
the role of economising is not confined to social orderings having an indi-
vidualistic basis. As Bergson (1938) has pointed out, a variety of different
types of social welfare functions or social orderings are conceivable. They
could for example reflect the values of particular individuals. Nevertheless,
if one is to engage in economising one needs at least some preference order-
ing of the resource-use possibilities of society. Such an ordering need not
be complete but if it is complete and transitive, it will allow an ‘optimum’
allocation of resources to be determined.
By way of introduction, consider how economics can help us conceptu-
alise some general problems in the allocation of resources involving the
biosphere and the environment. Conceptually, the natural environment or
biosphere itself is able directly to produce goods and services, e.g., recre-
ational opportunities, maintenance of a genetic stock of species, clean
air and water. But in addition, humans draw upon the resources of the
biosphere (uses these as inputs) to produce goods of their own creation,

‘man-made’ goods. There may therefore be a trade-off between the pro-
duction of environmental natural goods and man-made goods. The
production possibility frontier involving man-made goods and environ-
mental natural goods might be of the type indicated by curve ABCD in
Figure 1.1. This indicates that the provision of natural environmental
goods up to a level of x* is complementary to the production of man-
made goods. Such complementarity might come about for example,
because the retention of natural tree cover reduces flooding and erosion
and helps maintain agricultural output. Given all the techniques available,
the production possibility set might consist of the set bounded by
OABD. Some techniques of production may for instance be such that the
4 Economics of environmental conservation
combination at point J results. Given that both more natural environmen-
tal goods and more man-made goods are desired, J is an inferior economic
position. If welfare is to be maximised, society must adopt a pattern of
resource-use that results in its being on its production possibility frontier
in the efficiency segment BCD. Not only are combinations below the pro-
duction possibility frontier socially inferior but in view of the comple-
mentarily relationship so too are combinations on the segment AHB. In
both these cases it is possible to produce more of all the types of desired
goods by reorganising resource-use.
It seems that a complementary production relationship does exist up to
a point (a segment like AHB) between the production of man-made
goods and goods provided by the natural environment and this on its own
would provide an argument for conservation of biological resources.
However, in addition humans directly value many goods produced by the
natural environment. When this is taken into account, there is an addi-
tional economic reason to be concerned with the conservation and man-
agement of natural biological resources. Given the preference indicated
by the indifference or iso-welfare curves marked W

1
W
1
,W
2
W
2
and W
3
W
3
in Figure 1.1 (and assuming that these curves have the usual properties
associated with indifference curves e.g., each indicates combinations
giving an equal level of human welfare and higher curves are associated
with greater welfare) (Tisdell, 1972), the combination at position C is
socially optimal. This involves the production of y** of man-made goods
and x** of environmental goods. Consequently it is optimal to forgo
some man-made production for additional goods produced by the natural
environment.
A position below the production possibility frontier such as J may
come about because of the use of inferior technologies or because of a
Economics and the living environment 5
y
A
O
y*
x* x** x
H
B
J

C
D
y**
W
3
W
2
W
2
W
1
W
1
W
3
Quantity of natural goods supplied by the environment
Quantity of man-made goods per year
Figure 1.1 Choice and trade-off between supply of man-made goods and
those provided by the natural environment