A.

THE ECONOMICS OF NATURAL RESOURCES When sentient humans first evolved hundreds of thousands of years ago, their economies were based on hunting, fishing, and gathering, with a rich natural environment but little capital beyond a few sharp sticks and stones. Today, we generally take for granted the bounty of clean air, plentiful water, and unspoiled land. But what is the threat to humanity if we do not respect the limits of our natural environment? At one pole is an environmentalist philosophy of confines and perils. In this view, human activities threaten to poison our soils, deplete our natural resources, disrupt the intricate web of natural ecosystems, and trigger disastrous climate change. The environmentalist point of view is well e pressed in the bleak warning from the distinguished !arvard biologist ". #. Wilson$ "nvironmentalism . . . sees humanity as a biological species tightly dependent on the natural world. . . . %any of "arth&s vital resources are about to be e hausted, its atmospheric chemistry is deteriorating, and human populations have already grown dangerously large. 'atural ecosystems, the wellsprings of a healthful environment, are being irreversibly degraded. . . . I am radical enough to take seriously the (uestion heard with increasing fre(uency$ Is humanity suicidal? "conomists tend to emphasi)e that efficient management of the economy requires proper pricing of natural and environmental resources RESOURCE CATEGORIES What are the important natural resources? They include land, water, and the atmosphere. The land gives us food and wine from fertile soils, as well as oil and other minerals from the earth&s mantle. #ur water gives us fish, recreation, and a remarkably efficient medium for transportation. The precious atmosphere yields breathable air, beautiful sunsets, and flying space for airplanes. 'atural resources *including land+ are a set of factors of production, ,ust like labor and capital. They are factors of production because we derive output or satisfaction from their services. "conomists make two ma,or distinctions in analy)ing natural resources. The most important is whether the resource is appropriable or inappropriable. A commodity is called appropriable when firms or consumers can capture its full economic value. #n the other hand, a resource is inappropriable when some of the costs and benefits associated with its use do not accrue to its owner. This leads to a central result in the economics of natural resources and the environment$ When markets do not capture all the costs and benefits of using natural resources, and e ternalities are therefore present, markets give the wrong signals and prices are distorted. %arkets generally produce too much of goods that generate negative e ternalities and too little of goods that produce positive e ternalities.

Techni(ues used for managing resources depend on whether the resources are renewable or nonrenewable. A nonrenewable resource is one whose supply is essentially fi ed. By contrast, renewable resources are ones whose services are replenished regularly. FIXE LAN AN RENTS The single most valuable natural resource is land. -nder law, ownership of .land/ consists of a bundle of rights and obligations such as the rights to occupy, to cultivate, to deny access, and to build. Rent as Return to Fixed Factors The price of such a fi ed factor is called ren! or pure econo"ic ren!. "conomics apply the term .rent/ not only to land but also to any other factor that is fi ed in supply 0ent *or pure economic rent+ is payment for the use of factors of production that are fi ed in supply. Market Equilibrium The supply curve for land is completely inelastic 1 that is, vertical 1 because the supply of land is fi ed. In 2igure 3453, the demand and supply curves intersect at the e(uilibrium point E. It is toward this factor price that the rent of land must trend. Why? Taxing Land The fact that the supply of land is fi ed has a very important conse(uence. 6onsider the land market in 2igure 3457. 8uppose the government introduces a 9: percent ta on all land rents, taking care to ensure that there is no ta on buildings or improvements. #. EN$IRONMENTAL ECONOMICS A stern warning from environmentalists ;aul 0. "hrlich and Ann !. "hrlich in 7::< illustrates these concerns$ #ur species has already plucked the low5hanging resourced fruit and converted the richest lands to human uses. . . 6limate change is a ma,or threat, even if it may not be the greatest environmental problem.

EXTERNALITIES

0ecall that an externality is an activity that imposes involuntary costs or benefits on others, or an activity whose effects are not completely reflected in its market price. Public vs. Private Goods %ublic &oo's are ones whose benefits are indivisibly spread among the entire community, whether or not individuals desire to consume the public good. %ri(a!e &oo's) by contrast, are ones that can be divided up and provided separately to different individuals, with no e ternal benefits or costs to others. "fficient provision of public goods often re(uires government action, while private goods can be efficiently allocated by private markets. MAR*ET INEFFICIENC+ ,ITH EXTERNALITIES Analysis o !ne iciency The managers therefore decide to clean up ,ust to the point where profits are ma imi)ed. This re(uires that the benefits to the firm from additional abatement *.marginal private benefits/+ be e(ual to the cost of additional cleanup *.marginal cost of abatement/+. We now see how pollution and other e ternalities lead to inefficient economic outcomes$ In an unregulated environment, firms will determine their most profitable pollution levels by e(uating the marginal private benefit from abatement with the marginal private cost of abatement. When the pollution spillovers are significant, the private e(uilibrium will produce inefficiently high levels of pollution and too little cleanup activity. "ocially E icient Pollution =iven that private decisions on pollution control are inefficient, is there a better solution? In general, economists look to determine the socially efficient level of pollution by balancing social costs and benefits. %ore precisely, efficiency requires that the marginal social benefits from abatement equal the marginal social costs of abatement. !ow might an efficient level of pollution be determined? "conomists recommend an approach known as cost-benefit analysis, in which efficient emissions are set by balancing the marginal costs of an action against the marginal benefits of that action. In the case of >irty ?ight @ ;ower, suppose that e perts study the cost data for abatement and environmental damage. They determine that marginal social costs and marginal social benefits are e(uali)ed when the amount of abatement is increased from 9: tons to 79: tons. At the efficient pollution rate, they find that the marginal costs of abatement are A4: per ton, while the marginal social benefits from the last unit removed are also A4: per ton. The resulting level of pollution is socially efficient because such an emissions rate ma imi)es the net social value of production. #nly at this level of pollution would the marginal social cost of abatement e(ual the marginal social benefit. !ere again, as in many areas, we determine the most efficient outcome by e(uating the marginal costs and benefits of an activity.

6ost5benefit analysis will show why e treme .no5risk/ or .)ero5discharge/ policies are generally wasteful. 0educing pollution to )ero would generally impose astronomically high cleanup costs, while the marginal benefits of reducing the last few grams of pollutions may be (uite modest. In some cases, it may even be impossible to continue to produce with )ero emissions, so a no5risk philosophy might re(uire closing down the computer industry or banning all vehicular traffic. =enerally, economic efficiency calls for a compromise, balancing the e tra value of the industy&s output against the e tra damage from pollution. An unregulated market economy will generate levels of pollution *or other e ternalities+ at which the marginal private benefit of abatement e(uals the marginal private cost of abatement. "fficiency re(uires that the marginal social benefit of abatement e(uals the marginal social cost of abatement. In an unregulated economy, there will be too little abatement and too much pollution. #aluing $amages #ne of the ma,or difficulties involved in setting efficient environmental policies arises because of the need to estimate the benefits of pollution control and other policies. In cases where pollution affects only marketed goods and services, the measurement is relatively straightforward. If a warmer climate reduces wheat yields, we can measure the damage by the change in the net value of the wheat. 8imilarly, if a new road re(uires tearing down someone&s house, we can calculate the market value of a replacement dwelling. -nfortunately, many types of environmental damage are e tremely difficult to value. A classic e ample was the proposal to ban logging across much of the ;acific 'orthwest in order to preserve the habitat of the spotted owl. That would cost thousands of logging ,obs and raised lumber prices. !ow should we value the benefits in terms of the continued e istence of the spotted owl? #r, to take another e ample, the Exxon Valdez oil spill in ;rince William 8ound, Alaska, damaged beaches and killed wildlife. !ow much is the life of a sea otter worth? "conomists have developed several approaches for estimating impacts, such as those on owls and otters, that do not show up directly in market prices. The most reliable techni(ues e amine the impact of environmental damage on different activities and then put market5derived values on those activities. 2or e ample, in estimating the impact of emissions of sulfur dio ide, environmental economists first estimate the impact of higher emissions on health, and they then place a dollar value on health changes using either survey techni(ues or estimates that are revealed by people&s actual behavior. 8ome of the most difficult cases occur in situations that involve ecosystems and the survival of the different species. !ow much should society pay to ensure that the spotted owl survives? %ost people will never see a spotted owl, ,ust as they will never see a whooping crane or actually visit ;rince William 8ound. They may nevertheless place a value on these natural resources. 8ome environmental economists use a techni(ue called contingent valuation, which involves asking people how much they would be willing to pay in a hypothetical situation, say, to keep some natural resource undamaged. This techni(ue will yield answers, but these answers have not always proved to be reliable.

2ew would doubt that a healthy and clean environment has a high value, but placing reliable values on the environment, particularly on the nonmarket components, has proved a difficult business. Gra%&ical Analysis o Pollution We can illustrate these points with the help of 2igure 345B. The upward5sloping market MC curve is the marginal cost of abatement. The downward5sloping curves are the marginal benefits of reducing pollution, with the upper, solid M ! line being the marginal social benefit from less pollution while the lower, dashed M"! line is the marginal private benefit of abatement to the polluter. Cau!ion on Grap-in& %ollu!ion In analy)ing pollution, it is useful to think of pollution control or abatement as .good./ In the graphs, we therefore measure marginal costs and benefits on the vertical a is and the abatement or pollution removed on the hori)ontal a is. The trick here is to remember that because pollution removal is a good, it is measured positively on the hori)ontal a is. Cou can also think of pollution as measured negatively from the far5right point of 4::. 8o abatement of )ero is pollution of 4::, while abatement of 4:: means )ero pollution. The unregulated market solution comes at point #, where the marginal private costs and benefits are e(uated. At this point, only 9: tons are removed, and the marginal private costs and benefits are A3: per ton. But the unregulated market solution is inefficient. We can see this by performing an e periment that increases abatement by 3: tonsD this is represented by the thin slice to the right point #. 2or this additional removal, the marginal benefits are given by the total area of the slice under the M ! curve, while the marginal costs are given by the area of the slice under the MC curve. The net benefits are that part of the slice shown by the shaded area between the two curves. The efficient level of pollution comes at point E, where the marginal social benefits are e(uated to marginal costs of abatement. At that point, both M ! and MC are e(ual to A4: per ton. Also, because M ! and MC are e(ual, the e periment of increasing abatement by a tiny amount will find that there is no difference between the curves, so there is no net benefit from additional pollution control. We can also measure the net benefits of the efficient solution relative to the unregulated market by taking all the little slices of net benefit from the shaded slice to point E. This calculation shows that the area # E represents the gains from efficient removal of pollutants.

120

MS B (Marginal social benefit) S

100

Marginal costs, benefits from removal)

80

60

MC(Marginal cost of abatement)

E
40

20

I
0 100

MPB (Marginal private benefit)

200

300

400

Abatement (pollution removed)

FIGURE ./01. Ine22icienc3 2ro" E4!ernali!ies When marginal social benefit *M !$ diverges from marginal private benefit *M"!$, markets will generate unregulated e(uilibrium at I, with too little abatement or pollution cleanup. "fficient cleanup comes at E, where M ! e(uals MC. %OLICIES TO CORRECT EXTERNALITIES What are the weapons that can be used to combat inefficiencies arising from e ternalities? The most visible activities are government antipollution programs that use either direct controls or financial incentives to induce firms to correct e ternalities. %ore subtle approaches use enhanced property rights to give the private sector the instruments for negotiating efficient solutions. We survey these approaches in this section. Government Programs $irect 'ontrols 2or almost all pollution, as well as other health and safety e ternalities, governments rely on direct regulatory controlsD these are often called social regulations. 2or e ample, the 3EF: 6lean Air Act reduced allowable emissions of three ma,or pollutants by E: percent. In 3EFF, utilities were told to reduce sulfur emissions at new plants by E: percent. In a series of regulations, firms were told they must phase out o)one5depleting chemicals. And so it goes with regulation.

!ow does the government enforce a pollution regulation? To continue our e ample of >irty ?ight @ ;ower, the state >epartment of "nvironmental ;rotection might tell >irty ?ight @ ;ower to increase its abatement to 79: tons of pollution. -nder command-and-control regulations, the regulator would simply order the firm to comply, giving detailed instructions on what pollution5control technology to use and where to apply it. There would be little scope for novel approaches or tradeoffs within the firm or across firms. #f standards are appropriately set 55 a very big .if/ 1 the outcome might approach the efficient pollution level described in the previous part of this section. While it is possible that the regulator might choose a combination of pollution5control edicts that guaranteed economic efficiency, in practice that is not very likely. Indeed, much pollution control suffers from e tensive inefficiencies. 2or e ample, pollution regulations are often set without comparisons of marginal costs and marginal benefits, and without such comparisons there is no way to determine the most efficient level of pollution control. In addition, standards are inherently a very blunt tool. "fficient pollution reduction re(uires that the marginal cost of pollution be e(uali)ed across all sources of pollution. 6ommand5and5control regulations generally do not allow differentiation across firms, regions, or industries. !ence, regulations are usually the same for large firms and small firms, for cities and rural areas, and for high5polluting and low5polluting industries. "ven though firm A might be able to reduce a ton of pollution at a tiny fraction of the cost to firm B, both firms will be re(uired to meet the same standardD nor will there be any incentives for the low5cost firm to reduce pollution beyond the standard even though it would be economical to do ,ust that. 8tudy after study has confirmed that our environmental goals have proved unnecessarily costly when we use command5and5control regulation. Market "olution( Emissions Fees In order to avoid some of the pitfalls of direct controls, many economists have suggested that environmental policy rely instead on market5type regulations. #ne approach is the use of emissions fees, which would re(uire that firms pay a ta on their pollution e(ual to the amount of e ternal damage it causes. If >irty ?ight @ ;ower were imposing e ternal marginal costs of AB9 per ton on the surrounding community, the appropriate emissions charge would be AB9 per ton. This is in effect internalizing the e ternality by making the firm pay the social costs of its activities. In calculating its private costs, >irty ?ight @ ;ower would find that, at point E in 2igure 345B, additional ton pollution would cost A9 of internal costs to the firm plus AB9 in emissions fees, for an overall marginal cost of A4: per ton of pollution. By e(uating the new marginal private benefit *private benefit plus emissions fee+ with the marginal abatement costD the firm would set its abatement at the efficient level. #f the emissions fee were correctly calculated 1 another big .if/ 1 profit5minded firms would be led as if by a mended invisible hand to the efficient point where marginal social costs and marginal social benefits of pollution are e(ual. The alternative approaches are shown graphically in 2igure 3454, which is similar to 2igure 345B. With the direct5control approach, the government instructs the firm to remove 79: tons of pollutants *or to emit no more than 39: tons+. This would, in effect, place the standard at the

heavy vertical line. If the standard were set at the right level, the firm would undertake the socially efficient level of abatement. !ence, with efficient regulation, the firm will choose point E, where M ! e(uals MC.
Government-imposed pollution standard Marginal cost, augmented marginal benefit, price

MC

E
40 MPB + emissions fee

MPB
0 250 Abatement (pollution removed) 400

FIGURE ./0/. %ollu!ion S!an'ar's an' E"issions Fees When government sets pollution limitation at 39: tons, or re(uires removal of 79: tons, this standard will lead to efficient pollution at point E. The same result can be achieved with pollution fees of AB9 per ton. The A9 M"! plus the emissions fee gives a total marginal benefit of A4: at an abatement of 79: tons. !ence the augmented marginal benefit curve *M"! % emissions fee+ e(uals MC at the efficient level, E. We can also see how emissions fees would operate. 8uppose that the government levies a fee of AB9 per ton of pollution. Including the fee, the marginal private benefit of abatement would rise from A9 to A4: per ton. We show this as the augmented marginal5private5benefit schedule in 2igure 3454. 2aced with the new incentives, the firm would choose efficient point E in 2igure 345 4. Market "olution( Tradeable Emissions Permits A new approach that does not re(uire the government to legislate ta es is the use of tradeable emissions permits. With this approach, instead of telling firms that they must A per unit of pollution and then allowing firms to choose the level of pollution, the government chooses the level of pollution and allocates the appropriate number of permits. The price of permits, which represents the level of the emissions fee, is then set by supply and demand in the market for permits. Assuming that firms know their costs of production and abatement, the tradeable5 permits approach has the same outcome as the emissions5fee approach. Econo"ic Inno(a!ions5 Tra'in& %ollu!ion %er"i!s

%ost environmental regulations use a command5and5control approach that limits the emissions from individual sources, such as power plants or automobiles. This approach cannot cap overall emissions. %ore important, it virtually guarantees that the overall program is inefficient because it does not satisfy the condition that emissions from all sources must have e(ual marginal costs of abatement. In 3EE:, the -nited 8tates introduced a radical new approach to environmental control in its program on control of sulfur dio ide, which is one of the most harmful environmental pollutants. -nder the 3EE: 6lean Air Act amendments, the government allocates a limited number of pollution permits. The total number of tons permitted for the country has been gradually reduced since 3EE:. The innovative aspect of the plan is that the permits are freely tradeable. "lectric utilities receive pollution permits are allowed to buy and sell them with each other ,ust like pork bellies or wheat. Those firms which can reduce their sulfur emissions most cheaply do so and sell their permits to polluteD other firms which need additional permits for new plants or have no leeway to reduce emissions find it economical to buy permits rather than install e pensive antipollution e(uipment or shut down. "nvironmental economics believe that the enhanced incentives allow the ambitious targets to be met at a much lower cost than would be paid under traditional command5and5control regulation. 8tudies by economist Tom Tletenberg of 6olby 6ollege in %aine have determined that the traditional approaches cost 7 to 3: times as much as would cost5effective regulations like emissions trading. The behavior of this market has produced a big surprise. #riginally, the government pro,ected that permits in the early years would sell for around AB:: per ton of sulfur dio ide. But in practice, the market price in the early years fell to below A3:: per ton. #ne reason for the success was that the program gave strong incentives for firms to innovate, and firms found that low5sulfur coal could be used much more easily and cheaply than had earlier been anticipated. This important e periment has given powerful support to economists who argue for market5 based approaches to environmental policy. Private A%%roac&es It is generally thought that some form of government intervention in the market is necessary to overcome the market failures associated with pollution and other e ternalities. In some cases, however, strong property rights can substitute for government regulations or ta es. #ne private5sector approach relies upon liability la&s rather than upon direct government regulations. -nder this approach, the legal system makes the generator of e ternalities legally liable for any damages caused to other persons. In effect, by imposing an appropriate liability system, the e ternality is internali)ed. In some areas, this doctrine is well established. 2or e ample, in most states, if you are in,ured by a negligent driver, you can sue for damages. #r if you are in,ured or become ill from a defective product, the company can be sued for product liability.

While liability rules are in principle an attractive means of internali)ing the nonmarket costs of production, they are (uite limited in practice. They usually involve high litigation costs, which add an additional cost to the original e ternality. In addition, many damages cannot be litigated because of incomplete property rights *such as those involving clean air+ or because of the large number of companies that contribute to the e ternality *as in the case of chemicals flowing into a stream+. A second private approach relies upon strong property rights and negotiations among parties. This approach was developed by the -niversity of 6hicago&s 0onald 6oase, who showed that voluntary negotiations among the affected parties can sometimes lead to an efficient outcome. 2or e ample, suppose that I am a farmer using fertili)ers that flow downstream and kill many of the fish in your ponds. 2urther, suppose that you cannot sue me for killing your fish. If your fish business is sufficiently profitable, you may try to get me to reduce my fertili)er use. In other words, if there is a net profit to be made from reorgani)ing our ,oint operations, we have a powerful incentive to get together and agree on the efficient level of fertili)er runoff. %oreover, this incentive would e ist without any government antipollution program. When property rights are well defined and transaction costs are low, particularly when there are few affected parties, strong liability laws or negotiation can sometimes operate to produce an efficient resolution in the presence of e ternalities CLIMATE CHANGE5 TO SLO, OR NOT TO SLO, #f all the environmental issues, none is so worrisome to scientists as the threat of global warming from the greenhouse effect. 6limatologists and other scientists warn that the accumulation of gases like carbon dio ide *6# 7+, largely produced by the combustion of fossil fuels, is likely to lead to global warming and other significant climatic changes over the ne t century. #n the basis of climate models, scientists pro,ect that if current trends continue, the earth may warm 4G to <G 2ahrenheit over the ne t century. This would take the earth&s climate out of the range e perienced during the entire period of human civili)ation. The greenhouse effect is the granddaddy of public5good problemsD actions today will affect the climate for all people in all countries for centuries to come. The costs of reducing 6# 7 emissions come in the near term as countries cut back their use of fossil fuels by conserving energy and using alternative energy sources *solar energy or perhaps nuclear power+, plant trees, and take other measures. In the short run, that means we will have to accept more 1 e pensive energy, lower living standards, and lower consumption levels. The benefits of emissions reductions will come many years in the future, when lower emissions reduce future climate5induced damages 1 with less disruption to agriculture, seacoasts, and ecosystems. "conomists have begun to study the economic impacts of climate change in order to understand how nations might undertake sensible strategies. "conomic studies indicate that the market economies in advanced countries like the -nited 8tates are likely to be relatively insulated from climate change in the coming decades. The ma,or impacts are likely to be in agriculture, forests, and fisheries, along with unmanaged ecosystems such as coral reefs.

An efficient strategy for containing climate change re(uires weighing the marginal costs of reducing carbon dio ide *6#7+ emissions against the marginal benefits. 2igure 3459 shows schematically the marginal costs of reductions as MC and the marginal social benefits in dollars, while the hori)ontal a is measures reduction of carbon5dio ide emissions. ;oint E in the graph represents the efficient point at which marginal abatement costs e(ual marginal social benefits from slowing climate change. This is the point which ma imi)es the net economic benefits of emissions reductions. By contrast, the pure5market solution would come with emissions reductions at :, where M ! is far above the )ero MC. An e treme environmentalist solution, which attempts to reduce emissions to )ero, would come at the right5hand edge of the graph, where MC far e ceeds M !.
MC Marginal cost, marginal social benefits, carbon tax ($ per ton)

T*

!arbon ta" # MSB

r*
Emissions reductions (r)

FIGURE ./06. Carbon Ta4es Can Slow Har"2ul Cli"a!e C-an&e 8lowing climate change efficiently re(uires setting carbon ta es at '( or limiting carbon dio ide emissions to rH. 8uch measures would e(uate marginal costs of emissions reductions with marginal benefits of reducing damages from climate change. !ow can point E, the efficient level of 6# 7 emissions come from burning carbon5containing fuels, some have suggested a .carbon ta / on the carbon content of fuels. 2uels which contain more carbon, like coal, would be ta ed more heavily than low5carbon fuels such as natural gas. "conomists have developed models that estimate efficient paths for carbon ta es 1 ones that balance the economic costs of higher ta es with the benefits of reduced damages from global warming. These models can serve as a guide to policymakers in the design of policies to combat global warming. 2igure 3459 shows that if the carbon ta is set at the appropriate level, this would induce the efficient level of emissions reductions. Global %ublic Goo's an' *3o!o %ro!ocol We discussed the problem of global public goods earlier in this chapter. 'ations deal with global public goods through international agreements like treaties. These are designed to move from an

inefficient non5cooperative outcome to an efficient cooperative solution to the pollution game. But reaching efficient agreements often proves a useful e ample. Although scientists have raised alarms about climate change for more than three decades, there were no ma,or international agreements on climate change until the 2ramework 6onvention on 6limate 6hange *2666+ in 3EE7. The 2666 contained provisions in shich high5income countries agreed to non5binding commitments to limit the emissions of greenhouse gases like 6#7. When voluntary measures were ineffective, countries negotiated the 3EEF Iyoto ;rotocol on climate change. -nder the protocol, high5income countries along with formerly socialist countries agreed to binding commitments to reduce by 7:3: their total emissions of greenhouse gases by 9 percent *relative to 3EE: levels+. "ach country was allocated a specific target. Based on both economic theory and the e perience of the -.8. sulfur dio ide trading program *discussed above+, the Iyoto ;rotocol included a provision for emissions trading among countries. The protocol got off to a shaky start when the Bush administration withdrew the -nited 8tates from participation in 7::3. "conomists have undertaken detailed analyses of the alternative Japproaches available to tackle the issues involved in global warming. #ne conclusion of such studies is that it is critical to make sure that market participants face the full costs of their actions. 6urrently, the climate5change e ternality is not .internali)ed/ in most countries because 6#7 emissions have a )ero price. Without the appropriate price signals, it is unrealistic to think that the millions of firms and billions of consumers will make decisions that reduce the use of carbon fuels. "conomic studies also indicate that global participation 1 not ,ust the participation of high5income countries 1 is critical to slowing change in an economical fashion. By e cluding energy5intensive developing countries like 6hina and India from reduction re(uirements, the cost of meeting the global emissions goal is increased greatly relative to a cost5effective global agreement. The first round of the Iyoto ;rotocol went into effect in 7::<, but it covers only the period through 7:37. %any who are concerned about the future of the globe are looking to see whether the new #bama administration in the -nited 8tates will ,oin the effort and whether an efficient long5term solution can be designed, implemented, and enforced.

)uarrel and Pollute* or Reason and 'om%ute+ We have seen that many environmentalists are asking gloomy (uestions about the future of humanity. !aving surveyed the field, what should we conclude? >epending on one&s perspective, it is easy to become either optimistic or pessimistic about our ability to understand and cope with the threats to our environment. #n the one hand, it is true that we are moving into unchartered waters, depleting many resources while altering others in an irreversible manner, and gambling with our world in more ways than we reali)e. !umans seem ,ust as (uarrelsome today as they were at the dawn of recorded history, and they have devised weapons that are awesomely effective at avenging their grudges. At the same time, our powers of observation and analysis are also orders of magnitude more formidable.

What will prevail in this race between our tendencies to (uarrel and pollute and our powers to reason and compute? Are there enough resources to allow the poor to en,oy the consumption standards of today&s high5income countries, or will today&s rich pull the ladder up behind them? There are no final answers to these deep (uestions. But economists believe that one central answer is to employ market mechanisms to provide incentives to reduce pollution and other harmful side effects of economic growth. Wise decisions along with appropriate incentives will help to ensure that )omo sapiens can not only survive but also thrive for a long time to come. Source5 Econo"ics .7!- E'i!ion b3 %aul A. Sa"uelson an' ,illia" . Nor'-aus