ANALYSISDemand-side policies for environmental protection and sustainable usage of renewable resources
Introduction
Renewable resource systems such as tropical and temperate forests, coral reefs, and wild fisheries are often exploited at unsustainable rates (Brown and Pearce, 1994). Many would argue that some of these ecosystems are in a state of de facto collapse, despite the use of traditional management policies (Thorpe et al., 2000, Food and Agricultural Organization, 1995, Safina, 1995). One reason why many of these renewable resources are being exploited at higher than sustainable rates is because of the increase in global demand for the harvested products of these ecosystems (Edwards, 1992, Amelung and Diehl, 1991). The environmental and natural resource economics literature has examined market failures associated with over-exploitation of forests (Barbier et al., 1994, Repetto and Gillis, 1998, Kahn and McDonald, 1995, Caviglia and Kahn, 2001) and fisheries (Gordon, 1955, Anderson, 1976, Bjorndal and Munro, 1998, Danielsson, 2000). Within this framework, efficient policies to correct market failures include defining and securing property rights, eliminating inefficient government subsidies, and correcting imperfect information to reduce deforestation (Caviglia, 1999, Wood and Walker, 1999, Alston et al., 1996) and limiting open-access in fisheries through individual transferable quotas (ITQs) and other property rights provisions (Copes and Cook, 1982, Muse and Schelle, 1989, Edwards, 1994, Derren and Gartside, 2001).
Traditional environmental resource management policies are designed to equate the private marginal cost of production with the social marginal cost of production. These policies can be viewed, in a microeconomic context, as supply-side policies because they attempt to internalize the externality through the definition of property rights, imposition of taxes, marketable quotas, subsidies, performance bonds or similar policies. While supply-side policies often can achieve efficiency by shifting the marginal cost function, they generally are not sufficient to achieve long-term sustainability when demand pressure is systematically growing because the policies have been developed for an economic environment in which demand is assumed to be exogenous or constant.
This paper focuses on the issues of both sustainability and efficiency by integrating demand-side policies into the mix of renewable resource and environmental management policies. These policies are designed to increase the demand for goods produced in a sustainable fashion. Demand-side policies can make three major contributions to resource and environmental management. The first contribution is to promote the long-term conservation of natural capital assets and the consumption opportunities and ecological services they offer to future generations. If the accelerating global demand for products made from renewable resources is not checked by policy, harvest rates will increase. This could increase the probability of over-exploitation, and in some cases result in eventual depletion of the resource. Unsustainable use of a renewable resource occurs when the quantity of extraction exceeds the net addition to the stock in the relevant time period. A reduction in demand could, therefore, reduce the extraction rate.
The second major contribution of the demand-side policies is to (in concert with more traditional supply-side policies) promote the attainment of economic efficiency. For example, if enforcement and monitoring problems or institutional and political factors prevent supply-side policies from fully internalizing external costs, demand-side policies can also help achieve economic efficiency as a ‘second-best’ type of policy instrument. Factors that prevent the full internalization of external costs are likely to exist in many of our important renewable resource systems, including forests and fisheries.
The third major contribution is that these policies may be more politically acceptable because they employ positive incentives rather than the disincentives that are utilized with supply-side policies. Since political acceptability can be a major influence for policy, demand-side policies can provide viable alternatives for policy makers.
This paper is organized into eight sections. Section 2 investigates the impact of unsustainable activities on renewable resource systems. In Section 3 we provide an overview of demand-side policies and definitions of the two applications presented in this paper. In Section 4 we examine the choice between sustainable and unsustainable activities and discuss how this choice is affected by traditional supply-side policies used to correct market failures in comparison to demand-side policies. Section 5 continues with a discussion of demand-side policies that can be used to increase the demand for alternatives in production. In Section 6 we turn to demand-side policies that promote substitutes in consumption. Section 7 discusses the importance of developing concurrent policies to reduce market failures such as insecure property rights and lack of access to capital markets. And, in Section 8 we summarize the arguments and discuss the future potential of generating sustainability through demand-side policies.
Section snippets
Renewable resource use and environmental externalities
There are two types of inefficiencies associated with the over-exploitation of renewable resource systems. The first inefficiency concerns the traditional management issues of open-access and associated property rights-based market failures that encourage over-harvesting in the current period. This over-harvesting subsequently generates a stock reduction that further lessens future productivity and the regenerative capability of the resource itself. The second major source of inefficiency
Demand-side policies: definition
Demand-side policies are income-based incentives designed to influence demand in favor of sustainably produced products. Two types of demand-side policies are examined in this paper: (1) demand-side policies that develop substitutes in production, and (2) demand-side policies that develop substitutes in consumption. The first type of demand-side policy focuses on increasing the demand for products that are sustainability produced in the ecosystem in question and are substitutes in production
The impact of alternative policies on costs and incomes
Policies designed to correct market failure generally increase marginal private cost to equate it with marginal social cost. Within this framework, standard welfare analysis is applied to assess the policy effects on efficiency from cost adjustments. However, policies that correct market failure do not only affect cost, they also affect income. Economists have not addressed income effects much because they focus on equity over efficiency. However, these effects are important because they
Increasing the demand for the sustainable products of an ecosystem
Tropical rainforests provide good examples of the potential for demand-side policies that utilize substitutes in production. Much of the current economic activity in the rainforests is unsustainable, yet sustainable alternatives exist that have a higher income potential (Grimes et al., 1994, Smith et al., 1996, Current et al., 1998, Caviglia, 1999). This section of the paper explains how demand-side policies can shift the income path for sustainable activities upward, thereby increasing the
Reducing Ecosystem Demand
Fisheries provide good examples of the potential for demand-side policies that utilize substitutes in consumption. Many oceanic, near-shore and inland fisheries have collapsed or come close to collapse due to the increased demand for fish and the unchecked access to the fisheries. The United Nations Food and Agricultural Organization (FAO) (Food and Agricultural Organization, 1992) reported that 13 of the 17 major ocean fisheries are at, or beyond, maximum sustainable yield. Moreover, the FAO
Application of demand-side policies and distributional issues
One implication of the analysis of demand-side policies in the forestry case versus the fishery case is the distributional difference. The small-scale rainforest farmer, who was actually or potentially engaged in the unsustainable activity, is also the person who would benefit from the increase in demand for the alternative sustainably produced products. In marked contrast, the commercial (or subsistence) open-access fisher will seldom share in the benefits derived from aquaculture, because
Conclusion
Although the correction of market failure is an essential element in generating sustainable development, the correction of market failure in itself may be insufficient to catalyze economic incentives for sustainable use of renewable resources. In addition, steps must be taken to increase the income stream associated with sustainable activities in order to induce economic agents to shift to sustainable activities. This paper has shown the potential of demand-side policies to promote sustainable
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