Principles of Environmental Economics: Economics, Ecology and Public Policy

In Chapter 1, natural resources were recognized to be scarce and as such need to be used prudently. Furthermore, it was postulated that natural resources are owned by households and traded through market mechanisms. However, the economic process as presented by the circular flow diagram (Figure 1.1 in Chapter 1) does not go beyond this purely descriptive depiction of human economy. Chapters 2 and 3, in Part Two, are intended to provide the basic theoretical foundations essential for clear understanding of the neoclassical perspectives on resource scarcity and their allocation and measurement.

Chapter 2 is written with two broad objectives in mind. The first is to show how prices are formed in the market and the extent to which prices can be used as a measure of resource scarcity. The second is to provide a clear understanding of the welfare implications of the allocative efficiency of perfectly competitive markets—the so-called “invisible hand theorem.” The chapter will show why mainstream economists have such deeply felt trust in the power of the market as a means of allocating scarce resources in an orderly and effective manner.

Chapter 3 is an extension of Chapter 2. In this chapter the focus is on the factor (resource) market with a special emphasis on economic variables affecting natural resource prices. The main goals of this chapter are the following: (a) To provide a clear understanding of the

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