A microeconomic perspective on the role of efficiency and equity criteria in designing natural resource policy

Abstract

Deliberating on policy design to manage natural resources with clarity and precision is a difficult task, even for professional and highly experienced policy practitioners. These difficulties are exacerbated by confounding the crafting of policy instruments to change resource use (a behavioral matter related to resource management) with the consequential issue of who bears the cost of changing resource use (an equity matter). The confounding of behavioral and equity issues is not surprising because equity is commonly suggested as a criterion in the literature on policy instrument choice, and inequity in access to resources may also be one of the initial drivers of policy intervention. Here, we restate the microeconomic analysis of "open access" resources and highlight the fundamental difference between efficiency (including allocative inefficiency) and equity that emerges from that analysis. We then discuss the implications of this difference for the choice of policy instruments to resolve problems in natural resource management, at least for instruments that entail changing the behavior of primary producers. This discussion is centered on three key decisions for formulating policy: (1) choosing the preferred portfolio of uses for a natural resource, (2) choosing a policy instrument to change that portfolio, and (3) choosing a mechanism to distribute the costs of change fairly. To illustrate how these decisions may play out in a real-world example, we apply the decisions to a freshwater policy process in New Zealand. By articulating the distinction, microeconomics draws distinctions between efficiency and equity as policy objectives. Linking that distinction with the Tinbergen's principle regarding the matching of instruments to objectives, we aim to reduce the conflation of the decision-making criteria employed in policy formulation decisions. In doing so, we hope to assist policy makers to avoid policy failure by reducing the potential for the influence of self-interested parties, or concern about their welfare, to introduce process failures into the policy formulation and decision-making stages of the policy cycle.

Keywords

• efficiency
• equity
• natural resource management
• policy cycle
• policy design
• policy instruments
• public participation
• water quality