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What is Environmental and Natural Resource Economics?

Environmental and Resource Economics deals with the relationship between the environment and the productivity and welfare of an economy.

A basic economic function of the environment is to supply natural resources that  are important factors of production, such as energy, minerals or water. Resource Economics deals with the question of how those resources can be used in an optimal  - in terms of "when" and "how much" - fashion. A distinction is made between nonrenewable and renewable resources.

With nonrenewable resources, it is primarily a question of whether and how quickly known resource deposits should be extracted and consumed, while avoiding any  welfare losses. As the demand for such resources (e.g. petroleum) is determined by the price, the Resource Economics has also been concerned with price formation on resource markets.

Unlike finite resources renewable resources can grow again despite intensive use - as
is the case, for example, with fisheries or timber.  From an economic point-of-view, efficiency requires not just a sustainable rate of resoure usage, but also a reasonable return on the capital. This rate is determined by the natural growth rate of the resource, and often depends on how much of the stock is left.

The second basic function of the environment is to absorb unwanted by-products of production and consumption - thus pollution emissions, waste water or waste. Economically speaking, polluting the environment is a free good, because there are no market prices for environmental amenities such as clean air, a healthy ecosystems or a stable climate. However, the pollution may cause considerable economic damages. Because the polluter bears only a small part of  that cost while the bulk of it is imposed on others, pollution is a negative externality that must be regulated.

Environmental Economics is about the question of how environmental regulation can be designed in economically sensible ways. To this end, one needs to first  determine, the socially desirable level of pollution, guided by a comparison of the costs and benefits of pollution. This necessitates an economic evaluation of environmental damages, which is a formidable task. Therefore, the development of appropriate methods for valuation is an important subarea of environmental economics.

In addition, Environmental Economics focuses a lot on regulation, i.e. the design of appropriate policy measures that prevent economic agents from exceeding the socially desired level of pollution. The subtle difference to "mere" environmental policy is to achieve this at minimal cost. Against this background, market-based policy measures, such as tradable pollution permits
have gained significance.

Of growing importance in environmental policy are transboundary environmental problems that can only be solved through joint efforts of several countries. Global climate change is a prime example of this. In this context, the importance of  cost effective policies fades
in the face of the challenge to get hundreds of states to cooperate despite conflicting incentives. Environmental economics draws on game theoretic concepts in order to devise solutions to this challenge.

Interested? The department of economics at the University of Mannheim offers  various courses in Environment and Natural Resources
in their Bachelors and Masters programs. Bachelor and Master theses can be supervised in this area.