PREFACE
This 1991 volume is a response to the current environmental debate in New Zealand and Australia. The author argues that the pursuit of efficient economic growth remains the key to both environmental and economic policy design. The challenge is to bring environmental considerations explicitly into the economic calculus, through assignment of property rights and obligations and, if necessary, by using "polluter pays" charges and taxes.
The alleged conflict between economic growth, correctly defined, and environmental goals is found to arise only where entitlements and liability are poorly defined -- or difficult to enforce. In order to bring economic growth and the environment into harmony, this volume seeks to unleash market forces and improved incentives as means of facilitating the efficient achievement of both of these goals. The author argues that research clearly shows the superiority of property rights and incentive based approaches relative to the control and command mechanisms which are characteristic of centrally planned economies.
At present, Eastern European countries are starting the arduous transition from command and control structures towards a market system based on property rights and the rule of law. It would be ironic indeed if New Zealand and Australia, countries which are trying to strengthen their competitive base, responded to environmental issues by shifting to centralised control systems. "Command and control" systems have created not just poor economic performance, but some of the world's worst environmental disasters.
The author hopes that the release of Markets, Resources and the Environment will prove a worthwhile contribution to environmental policy debate.
Richard J. Wood
January 1991
GLOSSARY
Age-class -- stands of timber of the same age in a forest, or the timber taken from such stands.
Allowable cut -- the amount of timber that can be harvested from a forest under the SUSTAINED-YIELD, EVEN-FLOW constraint.
Anthropocentric -- having man and his welfare as the central focus of study.
Bituminous Coal -- type of coal that burns with a smoky flame.
Capital -- assets which are capable of generating income and which have themselves been produced. In more general use it can mean any asset or stock of assets -- financial or physical -- capable of generating income.
Carbon fixation -- the conversion of atmospheric carbon in CO2 molecules into organic carbon in plants through the process Of PHOTOSYNTHESIS.
Chlorofluorocarbons -- man-made chemical compounds of chloride, fluoride and carbon used in a wide variety of application including refrigerators and some aerosols.
Choke-off prices -- in the context of CONTINGENT VALUATION, the price at which consumers are no longer willing to pay for more of a good or service.
Command and control policies -- a general term used to encompass the range of direct regulatory environmental controls which mandate technical production processes; restrict the range of potential resource inputs or outputs; define particular management techniques and otherwise seek to impinge on particular aspects of production and consumption decisions.
Common property -- land or property belonging to a community. With open access to all, such communal ownership rights generally lead to environmental degradation.
Contingent valuation -- a form of market research which seeks to determine people's willingness to pay for goods which are normally unpriced.
Corporatisation -- the creation of a legal framework in which state-owned commercial operations are obligated to pursue market-based objectives while state ownership and control is retained.
Covenants -- legal instruments attached to title-deeds of ownership which limit an owner's right to use or trade his property. For example, covenants may enforce particular building standards or require other parties to be notified before a property is sold.
Demand -- the desire for a particular good or service supported by the necessary means of exchange to effect ownership.
Diminishing returns -- an observation, often stated as a law, that as extra units of one factor of production are employed, with all others held constant, the output generated by each additional unit eventually falls.
Discount rate -- a percentage rate used to reduce the value of future income streams and financial returns to their PRESENT VALUE. Discount rates generally reflect two elements: time preferences or the desire to consume now rather than later; and a real return on capital. A third element reflecting the riskiness of investment is sometimes added but generally risk is better handled with direct adjustments to the expected value of the future sum. Market rates of interest, which capture all the elements mentioned, are often used as discount rates.
Dissipation of rents -- the using up of ECONOMIC RENT by producers in ways other than lowering price.
Easements -- rights of way or similar rights over anothers' ground or property.
Economic rent -- the difference between the return made by a factor of production and the return necessary to bring it into production.
Efficiency (economic) -- a state of the economy in which no one can be made better off without making someone worse off. There are three types of efficiency: productive efficiency in which output of the economy is being produced at least cost; allocative efficiency in which resources are applied to producing the goods and services consumers value most; and distributional efficiency in which output is distributed in such a way as to maximise community welfare.
Effluent taxes -- taxes on liquid waste pollutants discharged into sewers and drains, or natural water bodies.
Electromagnetic spectrum -- the range of wavelengths of electromagnetic radiation including ultra-violet light, visible light, infra-red radiation, radio waves, gamma waves, etc.
Equity -- commonly associated with fairness and justice but in economics it has become associated with the slightly different concept of equalising incomes or opportunities. Intergenerational equity extends this concept to equalising either income, consumption, or access to a similar stock of resources between generations.
Exclusive rights -- property rights which assign full ownership to a single entity without being attenuated by legal instruments such as COVENANTS or EASEMENTS.
Expected value -- a measure of the value accruing to an investor from an asset which yields an uncertain flow of benefits. The measure is calculated using standard laws of probability.
External costs -- see EXTERNALITIES.
Externalities -- the costs and benefits of a transaction between two or more parties which impact on other parties not directly involved. Sometimes called spillover or third-party effects.
Formal title -- defined right of property ownership with or without possession but evidenced by legal instruments such as a title-deed.
Free-rider -- an individual or group who obtains benefits without the need to make sacrifice for them.
Greenhouse effect -- the raising of global temperatures by a blanket of gases around the earth reflecting infra-red radiation back to the surface.
Greenhouse gases -- gases which re-radiate infra-red radiation from the earth's surface creating the GREENHOUSE EFFECT. They include such gases as water vapour, carbon dioxide, methane, nitrous oxides and CHLOROFLUOROCARBONS.
Hardwood -- wood from trees classified botanically as Angiosperms. Most hardwood trees are broad-leaved and the wood is pored. The term does not denote the hardness of the wood, though it is sometimes used in this sense (see also SOFTWOODS).
Income redistribution -- expropriation of income by means of taxes, charges and other fiscal instruments in order to further EQUITY goals through social welfare payments and the like.
Internal costs -- costs which are borne by the parties involved in a transaction.
Labour/leisure substitution -- the shift of activities from earning taxable income to leisure resulting from a tax on labour income. More generally it can be seen as a substitution of taxed effort by untaxed leisure or effort.
Marginal cost and benefit -- the increase in total costs or benefits to a firm or organisation caused by increasing output by one extra unit.
Market-based instruments -- regulatory instruments, such as taxes, charges and permits, which utilise market based incentives to achieve desired outcomes at least cost.
Mineral lease -- an agreement by the owner of a mineral reserve (generally the crown) to grant rights to another party for a specified period under defined conditions.
Monopoly -- a market in which there is only one supplier.
Non-excludable goods or services -- goods and services are non-excludable when supply to one individual does not or cannot exclude others from also benefiting. Defence is one classic case; a scenic view is another.
Non-point externalities -- externalities which are diffuse and affect a wide-range of unrelated individuals; consequently they are hard to quantify and correct.
Non-rival -- used to describe a good or service which can be "consumed" by many individuals without diminishing its value (see also NON-EXCLUDABLE -- a related but slightly different concept).
Opportunity costs -- the value of alternative uses or activities which must be given up to acquire or achieve something else of value.
Optimum -- a position in which the aim of any economic unit is being served as effectively as possible within any constraints applying. It corresponds to economic efficiency.
Photosynthesis -- the process in which the energy in sunlight is used by green plants to build complex organic substances from carbon and water.
Point externalities -- externalities which affect only a few parties and consequently are amenable to negotiation and common-law agreements.
Present value -- the value of a future financial sum or stream of returns discounted to its value in current dollars at a chosen DISCOUNT RATE. If the chosen discount rate was the market interest rates, then the present value would be the current sum one should deposit in the bank now to yield an equivalent future sum.
Private costs -- costs borne by the individuals involved in a production or consumption decision, (compare SOCIAL COSTS)
Privatisation -- principally, the sale of government-owned commercial enterprises to private investors, with or without loss of government control in these organisations.
Property rights -- rights of ownership. For economic EFFICIENCY they need to be private, defined, monitored and tradeable.
Pulp-log -- logs unsuitable for sawmilling but used in the production of wood chips, pulp and paper and wood panels.
Resource rent -- see ECONOMIC RENT
Resource rent tax -- a tax supposedly levied on the ECONOMIC RENT associated with a resource such as a mineral deposit.
Ricardian rent -- see ECONOMIC RENT
Riparian rights -- rights to water assigned on the basis of who owns the river-bank.
Risk class -- a group of investments which involve a similar level of risk.
Risk premium -- an adjustment made to a DISCOUNT or interest rate to allow for uncertainty.
Royalty -- a sum paid to a resource owner for use of the resource.
Salination -- increased levels of mineral salts high in the soil profile caused by rising water tables. There are two types of salination: dry-land salination caused by the clearing of the trees and vegetation with increased water run-off raising water tables downstream; and wet-land salination caused by irrigation.
Saw-logs -- logs suitable for sawmilling.
Social costs -- costs of a production or consumption decision borne by individuals and communities not directly involved in such decisions, (compare PRIVATE COSTS)
Softwood -- timber from conifer species such as radiata pine and cypress pine.
Spillover costs -- see EXTERNALITIES
Supply -- the quantity of a good or service available for sale at any specified price.
Sustainable development -- a broad term popularised by the Brundtland Report, Our Common Future, in 1987. They defined it as "development that meets the needs of the present without compromising the ability of future generations to meet their own needs". It is thus closely related to the economic concept of intergenerational EQUITY.
Sustained-yield, even-flow management -- a traditional forestry management policy which maximises an even-flow of timber volume over time.
Tradeable rights -- see TRADEABLE QUOTAS AND PERMITS
Transaction costs -- costs involved in economic activities such as the sale and purchase of goods which do not in themselves contribute to the value of the activity. For example, negotiation costs, legal costs, etc.
Transferable quotas and permits -- rights to emit pollutants, to hunt, or fish, which can be exchanged between firms and individuals. A global ceiling is generally set on the total number of permits or quotas issued.
Vertical aggregation of the demand curve -- a summation of the prices all individuals would be willing to pay for each unit of a good or service.
Vest -- confer formally on an individual or group of individuals an immediate fixed right of present or future possession.
Welfare losses -- losses in consumer and producer welfare which generally result from the imposition of a government regulation or tax which forces consumers and producers to arrange their affairs in ways they would not freely choose. As a simplistic illustration, if an individual is forced to eat an orange instead of an apple, his welfare is diminished even if both cost the same.
Wildcatter -- speculative oil explorer.
Work program bidding -- offering to undertake expenditures as a condition of obtaining a lease.
Acknowledgments to: Bannock, G., Baxter, R.E. and Davis, E. (1987) Dictionary of Economics 4th ed. London: Penguin Books; and The Concise Oxford Dictionary 6th ed. Oxford: Oxford University Press.
ABBREVIATIONS
ACE = Allowable cut effect
ACF = Australian Conservation Foundation
ADR = Australian Design Rule
AFH = Associated Forest Holdings -- a division of APPM
APPM = Australian Pulp and Paper Manufacturers
CFCs = Chloroflorocarbons
CSIRO = Commonwealth Scientific and Industrial Research Organisation
CUMSEC = Cubic metre per second
EPA = Environmental Protection Agency
GDP = Gross Domestic Product
GHGs = Greenhouse gases
GNP = Gross National Product
IAC = Industries Assessment Commission now the IC (Industries Commission)
IP = International Paper
INFM = Intensification of Native Forest Management
ITQ = Individual trade able quota
NAFI = National Association of Forest Industries
NSW = New South Wales
OECD = Organisation for Economic Co-operation and Development
R&D = Research and Development
SEFA = South-East Forest Alliance
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