Associate Professor

Agricultural Economics Department

R K (PG) College, Shamli

 Uttar Pradesh, India 

Introduction

What we see and feel around us is a part of nature. The term natural resources consist of two words: natural and resources. Everything which is available to us freely in nature is called natural. All physical or material objects which have values and usefulness to human beings are known as resources. These resources may be manmade resources or natural resources. Man made resources are assembled or manufactured by men in factories with the use of natural resources. But natural resources are freely available to us in nature. These natural resources are directly or indirectly used by the human beings in the process of economic development of a country. Nowadays, land resources, water resources, forest resources, wildlife sanctuaries, biodiversity, fresh air, potable water, top fertile soils, minerals and petroleum products are some of the important natural resources.

Economics is basically a science of choice making process, in which decisions are taken to optimally allocate scarce resources among various competing ends or alternatives in order to maximize specific objectives. Before industrialization of western countries in eighteenth and nineteenth centuries, natural resources were available in nature in plenty amount. As these natural resources were not scarce at that time, these natural resources were not having economic value to the human beings. During industrialization process in western countries, demand for timber increased, which in turn put pressure on natural forest lands. As industrialization increased further, fresh air was used to dispose off harmful waste gases, virgin lands and fresh water streams were used to dispose off solid/ liquid waste materials of industries. After exploiting their own natural resources, these western countries started exploiting natural resources of their colonies. Same was the case with India. During colonial period, Britain required cotton and mineral to support their industries, wood for ship building, railway line construction and a host of other services. Forest lands were converted to agricultural lands in order to increase tax collection. After independence, this trend continued in order to give pace to Indian economy during first few Five Year Plans. Thereafter, the pressure of population increased steadily on natural resources. Now situation is that, where drinking water used to be freely available in early periods, now drinking water is being traded like other commodities in sealed bottles in open markets. Earlier, we used simple tape water for drinking and it didn’t cause any health issue. Nowadays, we install various water purifying appliances on water pipe lines to make the tape water safe for drinking. 

Importance of Natural Resources

1. Basis to Life: Natural Resources form the basis of life support system on the planet. Green leaves of plants prepare food with the synthesis of Carbon di-oxide and water in the presence of day light. Humans and animals are dependent on plants directly or indirectly for their food requirements. All living things on earth need fresh water to drink and fresh air to breathe. Top fertile soils support plant life on the earth. Oxygen released by plants during photosynthesis process in the presence of sun light is breathed in by humans and animals and carbon di-oxide is breathed out. This way, plant and animal life support each other and a balance of gases is maintained in the environment.

2. Necessary for Economic growth and Development: Growth and development of an economy largely depends on the presence of natural resources in that particular economy. Economy of gulf countries depends on the export of petroleum products from those countries. Similarly, the economy of hilly states like Jammu and Kashmir, Leh and Ladakh, Himachal Pradesh, etc. largely depend on tourism sector. General public from India and abroad usually visit hilly areas and reserved forest lands to enjoy scenic views. Tourism sector generates income and employment opportunities for local residents of these states.

3. Development of bio-diversity: Natural resources help in development of bio-diversities. Bio-diversity refers to the presence of different kinds and variations of life on earth. It is the measure of variations at genetic level, species level and ecosystem level. However, bio-diversity is not evenly distributed in nature. For example, tropical rain forests covering 10 % of earth’s surface are habitat to 90 % of world’s species. Bio-diversity is essentially a component of healthy ecosystem which provides us clean water to drink, food to eat and fresh air to breathe in.

4. Supply of raw material to industries and other construction activities: Natural resources supply raw material to agricultural sector, industrial sector and a variety of other construction activities. Timber is used for construction of various farm implements, railway lines, furnitures, construction of building, houses, etc. Various medicinal plants are used for development of medicines. Minor forest produce supply raw material for wood pulp, which is used in manufacturing of paper, rayon, ply woods and card boards.

5. Important source of fuel supply: Natural resources are the major source of energy generation in the world. Fossil fuels, hydel energy, thermal power, nuclear material, wind energy, tidal energy, solar energy and natural gases are all available in nature and are being used to develop electrical, mechanical, chemical and other forms of energy.

6. Natural habitat for large number of animals: Forest lands provide shelter to large variety of animals and birds. Sea, rivers, lakes and ponds are natural habitat for a variety of fishes and sea animals. These land and water animals, birds and fishes become a part of food chain and thus form balance of species in the ecosystem. Outside their natural habitat, no existence will be possible for wild life and other water animals.

7. Important source of foreign exchange: Natural resources are exported to other countries and thereby increase reserves of foreign exchange. Economy of gulf countries largely depend on export of petroleum products. India exports mica, coal and other mineral ores to other countries and adds up its foreign exchange reserves. Every year, large number of foreigners visit India to enjoy aesthetic value of natural resources.

8. Natural resources provide livelihood to tribal people: Livelihood of tribal people is totally dependent on natural forests. Tribal people obtain their medicines from plants and use herbs and other minor forest produce for a variety of reasons. Tribal people catch fishes from water bodies and use forest lands to graze their cattle.

9. Aesthetic value of natural resources: Natural resources provide aesthetic value to nature lovers. India is a vast country where a variety of climate is found throughout its length and breadth. Tourists love to visit coastal areas during winter season. People also visit hill stations during winters specially to see snow fall. Many people visit national parks and bird sanctuaries to see wild animals wandering in open and a variety of colourful birds.

10. Prevention of natural calamities: Natural resources help in maintaining ecological balance on earth. Green lush cover of trees not only purifies air, but also binds soils on roots. Green vegetation on earth prevents erosion of soils due to flow of wind and water. This natural vegetation helps in reduction of landslides on hills and occurrence of floods on plains.

Characteristics of Natural Resources

Natural resources are drawn free of cost from nature and are used with few modifications. These natural resources have got some peculiar characteristics which keep them different from other manmade resources. Some of these peculiar characteristics are as follow:

1. Exhaustibility: Most of the natural resources are exhaustible in nature, at least with the rate at which they are being exploited nowadays. On the basis of rate at which natural resources rejuvenate, these resources are classified as renewable and non-renewable resources. Process of regeneration of some resources is too slow to be considered renewable resources. Fossil fuels, coal, top fertile soils. etc. are examples of such resources. On the other hand, supply of timber, fishes, wild life, underground water, etc. are the examples of renewable resources. But nowadays, in blind race of economic growth of nations and due to increasing pressure of population worldwide, renewable resources are being exploited at faster rate than the rate of their regeneration. In some cases these resources have even exhausted completely. On 17th September 2022, 5 female and 3 male cheetahs were brought to Kuno National Park in Madhya Pradesh from Kenya. Earlier, India used to be a harbour to Asiatic cheetahs. However, due to unrestricted poaching, Asiatic cheetahs were extinct from India in mid-sixties. Recently, Cape Town city of South Africa was in news for intense water crisis (tape water ran dry) and the local authorities expressed their inability to supply water to the residents.

2. Common Property Resources: Most of the natural resources bear the characteristic of common property resource. Ownership rights on these resources are not defined. Therefore, one specific user of this resource can’t exclude another person from using that particular resource. Indian rivers are the examples of common property rights. Due to urbanization and growth of industries, pollution of rivers has increased. Water of these Indian rivers needs to be treated properly bearing extra cost before its supply to residents for domestic uses. Similarly, air pollution caused by industries posed health problems to the persons residing in nearby areas. However, the affected persons can’t exclude the urban authorities or industry owners for adding pollutants to natural resources, unless the government or judiciary intervene and handle the situation.

3. Existence of Gestation period: Natural resources need gestation period to become fully productive or useful asset. Length of gestation period may differ for a variety of natural resources. For example, decades old stock of timber has more economic value as compared to young stock of timber. Fishes gain market value after attaining a definite size and weight of a catch. Gestation period for fossil fuel is millions of years. Therefore, fossil fuel is considered non-renewable resource.

4. Natural Resources are a part of ecosystem: Natural resources are closely related to environment and form an integral of this complex ecosystem. Specific users of natural resources are generally not aware of their interactions with the environment and ultimately create imbalances in the ecosystem. Problems of global warming worldwide, sporadic incidence of drought, landslides on hills and floods on plains now have become regular features due to over exploitation of natural resources.

5. Uneven Distribution: Spatial distribution of natural resources have been uneven throughout the world. India is endowed with large number of rivers and underground water table, whereas gulf countries are endowed with large reserves of petroleum products. Jamaica holds the monopoly in production of bauxite (80 % of world’s total production).

6. Longevity:  Natural resources do not deteriorate, if kept unused for longer periods. Fresh water reserves, oil reserves, coal, mineral, forest resources, etc. can be stored in nature for indefinite period of time, given that no human activity is interacting with these resources.

7. Finiteness: All natural resources are available in limited quantity in nature at a given time. Supply of these natural resources do not change in short period of time. However, the supply of natural resources may increase in long run.

8. Produce Externality/ Internality: Use of natural resources by one category of people may have externality or internality effects on other category of people. For example, an individual/ a group of smokers in a crowed place may cause suffocation to non-smokers present in vicinity. This is called externality. On the other hand, if a person plays music on his personal mobile phone and other persons present nearby enjoy the same music, this is called Internality.

Classification of Natural Resources

Natural resources have been classified on the basis of different criteria as follow:

1. On the basis of source of origin:

(a)   Biotic Resources: All kinds of flora, fauna and their derivatives are known as biotic resources. Among other things, biotic resources include wild-life, fisheries and other aquatic animals, forest resources, fossil-fuel and coal.

(b)   Abiotic Resources: All natural resources which are either non-living or are derived from non-organic or non-living material are known as abiotic resources. Land, water, air and heavy metals like iron, gold, silver and copper are the examples of abiotic resources.

2. On the basis of stage of development:

(a) Potential Resources: Potential resources are those resources which are abundantly available in nature and can be used easily. However, humans have not discovered how to use them or are not able to tap their full potential. Once they understand the potentiality of the resource, supply of that particular resource can be augmented to meet future requirements. Solar energy, wind energy and tidal energy are the examples of potential resources.

(b) Actual Resources: All natural resources which are already known, useful and also accessible to human beings under the present regime of technology available are known as actual resources. These resources have already been surveyed; their quality and quantity have been determined in nature and are being used currently. Forest resources, water resources, fossil fuel are the examples of actual resources.

(c) Reserve Resources: Sometimes large reserves of natural resources are available, there uses and availability is already discovered by human beings and also accessible to be used within the available technological framework. However, these resources are not being used so that they can be preserved today and  used in future. Such resources are known as reserve resources. For example, the USA has the largest reserves of fossil fuel. However, the USA imports fossil fuel from other countries to meet her domestic demand of fossil fuel and kept her own reserves of fossil fuel as reserve resource. Reserve forests in many countries are also an example of reserve resources. Similarly, the storage of water in dams to meet energy requirements is also a reserve resource.

(d) Stock Resources: Sometimes, natural resources are available in plenty amount, but technology is not available to extract those resources. These resources nave been surveyed, but human beings are unable to tap these resources due to lack of technology. Deep sea reserves of coal and fossil fuel are the examples. Water is another example, which consists of two inflammable gases – Hydrogen and Oxygen. However, we are not able to derive energy from water.

3. On the basis of renewability of resources:

(a) Renewable Resources: Some natural resources are able to replenish their quantity over a certain period of time. These resources are inexhaustible resources. However, these resources can be exhausted if the rate of use of these resources is more than their rate of regeneration. Wild life, forests and fisheries are the examples of renewable resources.

(b) Non-renewable Resources: Some natural resources have limited stock on earth and can be exhausted after a certain period of time if used continuously. These resources are called non-renewable resources. Fossil fuel, mineral, coal, etc. are the examples of non-renewable resources.

4. On the basis of storability of resources:

(a) Flow Resources: Some natural resources can be used for indefinitely long period of time and their supply will never exhaust in nature. These resources are called flow resources. Solar energy, wind energy and tidal energy are the examples of flow resources.

(b) Stock Resources: Some natural resources are available in limited amount in nature. Such naturel resources are called stock resources. These resources do not regenerate and due to continuous use, these resources would exhaust after some time. These resources are called stock resources. Fossil fuel and coal are the examples of stock resources.

Natural Resource Management

By the term `natural resource management’, we mean allocation of scarce natural resources among competing ends in such a manner that the overall objectives of present generation society be maximized and at the same time, these resources be made available to the next generation without compromising with their quantity and quality. In other words, natural resources need to be  harnessed with the objective to attain maximum productivity for present generation without harming the future generation in terms of availability of natural resources. In past few centuries, due to rapid growth in industries, population and energy requirements, pressure on natural resources has increased and the natural resources have become economic goods instead of free goods. Therefore, these natural resources need to be managed successfully in the present day.

Objectives of Natural Resource Management

Economic Efficiency: Productivity of a resource refers to the level of output (Y) obtained form per unit of use () of that particular resource (X) in a production process at a given technology (Figure-1). Maximum possible productivity obtained from a resource is called its technical efficiency. In a frontier production function, every point lying on the production function is technically efficient for a given level of technology. All other points lying below the frontier production function are technically inefficient. However, if technology changes over time, frontier production function shifts upward and productivity of resource also increases on all points the frontier production function passes through. However, out of the numerous technically efficient points on a particular frontier.

Figure-1: Frontier Production Function and Economic Efficiency.

production function (say TPP_m) at a particular level of technology, there will be only one point A which gives maximum profit to the producer at prevailing prices of input (P_x) and output (P_y). At this point,  =  (Marginal product of input becomes equal to the price ratio of input and output). Hence, point A shows technical efficiency as well as pricing efficiency. Therefore, Production level of Y₁ output obtained by the use of X₂ level of input  at point A is economically efficient because this particular input-output combination comprises both - technical and pricing efficiency.

Equity: Equity in natural resource economics refers to the distribution of benefits derived from the use of natural resources. Economists usually consider equity in terms of Pareto efficiency, which states that efficiency in allocation of natural resources can be improved as far as at least one person is benefitted from the alternative resource allocation without harming the others. A particular allocation of natural resource will be Pareto efficient in which one person is better off without making some one worse off in alternative resource allocation situation. However, Pareto efficiency leaves aside the actual question of distribution of benefits derived from natural resources among resource poor and resource rich persons. This question needs to be answered with some subjective approach.

Sustainability: Sustainability refers to efficiency in use of natural resources over time. It means that we must use natural resources presently in such a manner that these resources remain available for consumption to future generations as well in similar quantities and qualities. Natural resources are vital for long life of planet. In absence of natural resources animal or plant life will not exist on the earth. Therefore, we need to conserve present day natural resources so that their supply remains unaffected to future generations.

Challenges to Natural Resources Management

Open Access Resource: Natural resources have access to all. Therefore, natural resources can not be considered private property by any individual. It is easy to manage private property resource because the owner a particular resource will not allow other persons to use his private property. However, this is not the case with natural resources. Persons sometimes use natural resources as free gift of nature and do not consider their value. For example, farmers are free to use excessive amounts of insecticides and pesticides on their fields. This action of the farmers may lead to contamination of underground water and make it unsafe for human consumption to the households in vicinity area.

Exhaustibility: Most of the natural resources are exhaustible in nature. Non-renewable resources are completely exhaustible. Renewable resources are also exhaustible in nature given that the rate of extraction of these resources is greater than rate of regeneration. In order to meet the demands of present generation, these resources need to be extracted. Due to growth in industrialization, economy and population of various countries, pressure on natural resources has increased and it has become challenging to conserve resources for future generations.

Market Failure: If prices are determined under perfect market conditions, then rising level of prices are true indicator of growing scarcity of a resource. However, sometimes markets do not function properly and scarce resources are over exploited. If one or more conditions of perfect market are distorted, market failure take place and prices of commodities do not convey correct signals. In case of natural resources, property rights are not well defined among users which leads to divergence between private and social costs of natural resources and market failure takes place.

Conflicting Objectives: Growth and development in economy is the prime objective of each nation. However, this objective conflicts with the sustainability of natural resources which aims at conservation of resources to meet the requirements of future generations. Maximization of these conflicting objectives pose a challenge to the natural resource managers.

Economic Analysis for Natural Resource Management

Basic Principles: Basic principles of economics are used to optimally allocate scarce natural resources among competing uses with twin objectives of maximum productivity and sustainability. Consumers go to market with their demands for commodities. Consumers’ demands for commodities are derived from the law of diminishing marginal utility. Producers supply commodities in the market. Law of diminishing marginal returns apply to the production of agricultural commodities. Farmers employ resources in production of agricultural commodities on the basis of principle of opportunity cost. Resources are used up in the production process where they have highest opportunity cost. Opportunity cost of a resource refers to the returns obtained from the next best use (production process) of that resource.

Demand and Supply: Consumers go to markets with their demands. Producers supply commodities in the market. Law of demand states that if other factors do not change, then demand of a commodity decreases with increase in the price of that commodity. On the other hand, supply of that particular commodity increases with increase in its price, ceteris peribus. Forces of demand and supply determine the prices of commodities in the market (Figure-2).

Figure-2: Determination of Price in Market

Non-price Signals: Market failure is more common in case of  natural resources which are not traded in the markets like private goods. In such cases government intervenes and frame laws to conserve natural resources. Government has made it illegal to poach wild animals and fell trees. Every year during onset of winter season, thick smog is settled around big cities (especially Delhi) and respiratory problems arise among residents in affected cities. Ultimately local authorities are pressurised to take steps for remedial measures.

Risk and Uncertainty:  A situation in which outcome of an event is not known with certainty, is called risk and uncertainty. However, risk and uncertainty are not same. In case of risk, probability of occurrence of an event is known (risk is measurable). On the other hand, uncertainty can not be measured in terms of probability. Risk is an important factor in management of natural resources because these resources are long life resources and investment on them involve rate of return. Usually, higher rate of return involves higher risk and low rate of return involves low level of risk. On such investments, natural resource managers have to take decisions carefully keeping in view the conservation of natural resources in long run.

Pareto Efficiency: Pareto efficiency is a condition which states that no other allocation of resources is possible which makes some one better off without making at least one person worse of. The term Pareto efficiency is named after an Italian economist and political scientist Vilfredo Pareto who was one of the pillars of Welfare Economics. In this section, we will study Pareto efficiency in simplified manner considering two inputs (land and water) and two commodities in an economy with the help of Edgeworth box.

Efficiency in production: Consider an economy in which only two commodities namely sugar and cloth are being produced with the help of two inputs – land and water. Total quantity of land and water are fixed in the economy. These two inputs are being allocated to production of two commodities (wine and cotton).

Figure-3: Edgeworth box representing efficiency in production

In the Edgeworth box as shown in figure-3, dotted line curves represent isoquant obtained by farmer A in production of wine by using resources land and water. Similarly, continuous line isoquant for production of cotton as produced by the farmer B is represented on inverted axes of land and water. A line joining the points of tangency between two inverted isoquants (E, F, G) shows efficiency in production. Any point lying above or below this line (eg H and Z) will be inefficient one, because by rearranging the resource allocation, production of at least one commodity can be increased without reducing the production of the other. Locus of all efficient points is called production efficiency curve. With the help of production efficiency curve, a production possibility frontier can be drawn on both commodity axes, given that total quantities of both inputs (land and water) are fixed (Figure-4).

Figure-4: Production Possibility Frontier

Figure-6: Efficiency in Production and Exchange

References

1. Howe, C. W. (1979). “Natural Resource Economics: Issues, Analysis and Policy”, John Wiley and Sons, New York.

2. Kerr, John M. and R. Swarup (1996). “Natural Resource Policy and Management Problems in India”,  a chapter in the book entitled ‘Natural Resource Economics: Theory and Application in India’, edited by John M. Kerr; Dinesh K. Marothia; Katar Singh; C. Ramasamy and William R. Bentley; Publisher: Oxford and IBH publishing Co. Pvt. Ltd., New Delhi.

3. Kerr, John M.; C. Ramasamy and T. R. Shanmugam (1996). “The Role of Markets in Natural Resource Management”,  a chapter in the book entitled ‘Natural Resource Economics: Theory and Application in India’, edited by John M. Kerr; Dinesh K. Marothia; Katar Singh; C. Ramasamy and William R. Bentley; Publisher: Oxford and IBH publishing Co. Pvt. Ltd., New Delhi.

4. Randall, A. (1987). “Resource Economics: An Economic Approach to Natural Resources and Environmental Policy”, Second Edition, John Wiley and Sons, New York.

5. Tyagi, Neha; Emami Limited; Mudita Mishra and Ravikant Mishra (2021). “Natural Resource Management”, a book chapter in the book entitled ‘An Education Way of Success’, Publisher: Nav-chetna Publication.