Efficiency problems in the allocation of natural capital resources arise because of
externalities that are familiar to natural resource and environmental economists. If a scarce natural resource is nevertheless freely available for the taking (open access), it will be over exploited
and incentives to invest in better protection and management will be lacking. If social
mechanisms for internalizing the costs of environmental degradation are lacking, then waste
production will be excessive and investments in waste byproducts management and
environmental remediation will be deficient.
Development theory has its own list of growth-retarding market and institutional failures
to add to the above list. Prominent examples include excessive investment costs because of
capital market failures; under-investment in human capital; inadequate infrastructure provision
(by public or private actors); and a variety of product market distortions. There are important
potential interactions between the two sets of market and institutional failures. In particular, high
costs of other investments, limited employment opportunities, and subsidies to certain output
sectors all may accelerate natural capital depletion beyond efficient levels. Both sets of market
and institutional failures thus admit the possibility of win-win improvements. Corrections of
distortions in the allocation of natural capital can stimulate economic progress and enhance
human welfare as well as protecting the environment per se. Correcting other failures can in a
number of cases also lower costly pressure on natural capital.5
The next three sections of the paper discuss and illustrate diagrammatically important
links between the natural and economic worlds for three sectors of the economy: agriculture,
forestry, and manufactures (industry). The first two sectors obviously depend heavily on
"natural capital" and also can have substantial environmental implications. For manufactures the
dependence on the natural world is somewhat less direct but no less important.