Environmental and natural resource economists study the tradeoffs associated wit
Environmental and natural resource economists study the tradeoffs associated with one of the most important scarce resources we have—nature. Economists mean something very specific when they use the word efficient. An allocation is generally efficient if it maximizes social well-being or welfare. Traditional economics defines welfare as total net benefits—the difference between the total benefits everyone in society gets from market goods and services and the total costs of producing those things. Environmental economists enhance the definition of welfare. The values of environmental goods like wildlife count on the “benefit” side of net benefits, and damages to environmental quality from production and consumptive processes count as costs.
Under ideal circumstances, market outcomes are efficient. In perfect markets for regular goods, goods are produced at the point where the cost to society of producing the last unit, the marginal cost, is equal to the amount a consumer is willing to pay for that last unit. This marginal benefit means that the net benefits in the market are maximized. Regular goods are supplied by industry such that supply is equivalent to the marginal production costs to the firms, and consumers demand them in such a way that we can read the marginal benefit to consumers of the demand curve; when the market equilibrates at a price that causes quantity demanded to equal the quantity supplied at that price, it is also true that marginal benefit equals marginal cost.
A well-functioning market would use non-renewable resources such as oil efficiently. It is socially efficient to use a non-renewable resource over time such that the price rises at the same rate as the interest rate. Increasing scarcity pushes the price up, stimulating efforts to use less of the resource and invest in research to make “backstop” alternatives more cost-effective. Eventually, the cost of the resource rises to the point where the backstop technology is competitive, and the market switches from the nonrenewable resource to the backstop. We see this with copper; high prices of non-renewable copper trigger substitution to other materials, like fiber optics for telephone cables and plastics for pipes. We would surely see the same thing happen with fossil fuels; if prices are allowed to rise with scarcity, firms have more incentives to engage in research that lowers the cost of backstop technologies like solar and wind power, and we will eventually just switch. Unfortunately, many conditions can lead to market failure such that the market outcome does not maximize social welfare. The extent to which net benefits fall short of their potential is called deadweight loss. Deadweight loss can exist when not enough of a good is produced, too much of a good is produced, or production is not done in the most cost-effective (least expensive) way possible, where costs include environmental damages. Some market failures (and thus deadweight loss) are extremely common in