Natural Resource Economics Essay

Paper Type:  Essay
Pages:  5
Wordcount:  1122 Words
Date:  2022-05-06

Role of Behavioral Economics in Designing Cost-Effective Policy Instrument to Manage a Renewable Resource Efficiently and Protect the Environment

Behavioral economics can be described as the study of the impacts of social, psychological, emotional and cognitive factors on the economic level and how these affect returns, resource allocation and market prices on the environment. Also, behavioral economics explains how some market decisions are made and how they affect the decisions of many regarding their business operations. All the economic choices made in the market have consequential effects on the environment as they entail making of cost-effective policies as well (Samson 2018). Behavioral economics also represent situations where consumers may greatly suffer from bad decisions that they made and have them affect the rest of their lives in the economic world. It means that their consumption rate is changed and this eventually leads to the distraction of the environmental policies which have been set by.

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Some of the economic decisions that affect the environment may be based on the kind of architecture a particular individual chooses. For instance, any small changes made on a specific type of design are likely to reflect back in consumer behavior and bring about environmental impact regarding its protection. Consumers have been known to make rational decisions when it comes to their purchase of goods (Samson 2018). For instance, a consumer may prefer to buy an item that is energy-efficient just because it suits their cost requirements. Hence, their behaviors are directed entirely towards the cost, benefit, and quality of a product. They also ensure that their purchase decisions maximize their utility entirely and hence they can rest assured that their purchase was worth it in the end.

Based on the many rational decisions consumers make, it is, therefore, the role of the government to balance between their consequences and the environmental protection. This process can be explained further through the designation of cost-effective policy instruments which are directed at saving the environment as well as managing renewable resources. Hence, the government, in this case, is entitled to address the behavioral economics of many consumers so that they may, in the end, suit their responsibilities of taking care of the environment as well as renewing resources. Hence one of the roles of behavioral economics is to correct market failures to ensure that all consumers are well informed so that they may comply well with the adoption of cost-effective policies which prevent any adverse environmental consequences from taking place (Auffhammer et at. 2018). It ensures that consumers do not make any errors which can allow ecological externalities to affect their behaviors in purchase and consumptions.

Secondly, efficiency and cost-effectiveness are one of the significant factors to consider whenever environmental policies are being designed to result in environmental protection. For instance, incentive-based instruments can be directed at provisions of high taxes when it comes to products that pollute the environment. For example, gas emissions produce carbon which is quite harmful to the environment; hence, these products should be highly taxed so that the government can generate enough revenue to invest in greenhouse projects which reduce their effects, therefore protecting the environment (Auffhammer et at. 2018). It will also enable consumers to maximize their social net benefits as they will participate in the protection of environment without their consent. Also, the government can use behavioral economics to price all the incorrectly rated products in the market so that as consumers make choices to purchase them, they may be sensitive to the environment.

Additionally, cost-effective instruments can be consequently used in the market to encourage consumers to make use of the renewable resources such as energy more so that environment conservation may be achieved as a result (Auffhammer et at. 2018). This process can be attained through encouraging energy-based companies to create awareness amongst their consumers to help them buy the energy conserving products which are capable of ensuring that renewable resources are maximally used for the benefit of the environment. Also, incentive instruments may be used in this case to motivate consumers to make decisions which favor the project and hence, in the end, achieve maximum environmental conservation.

Also, it is essential to reduce emissions leakage so that various industries may involve themselves in the upgrade of their manufacturing processes to attract more customers. This act entails the introduction of climate policies which are directed towards the reduction of allowances to many local producers so that they may strictly follow them and in the end; result in environmental protection (Auffhammer et at. 2018). This process can be achieved easily through the increase in their emission cost, and this effectively discourages them from emitting too many gases which are harmful to the environment. It also reduces their incentives due to the reallocation of valuable allowances which restrict them from polluting the situation further.

Also, policies such as Low Carbon Fuel Standard need to be implemented, so that clean environmental practices are encouraged further. In this case, behavioral economics is used regarding the influence created by these industries on consumers. Such policies are applied best when combined with cost factors such as containment mechanisms. These help with the use of market failures to bring in systems which demand low production of products which are a significant threat to the environment (Auffhammer et at. 2018). It means that many companies and industries end up being victims or rather users of the new policy instruments which require them to produce products which are sensitive to the environment. Consumers are also affected in this case as their consumption decisions are directed easily towards energy consuming products which are cost-effective.


In conclusion, behavioral economics acts as a significant contributor to the designing of cost-effective policies whose main aim is to manage renewable resources as well as protect the environment. Hence, the government also chips in to enable the implementation of the cost-effective policies so that consumers and producers may adopt behaviors which encourage the protection of the environment and sustainable activities to be achieved. For instance, behavioral economies help in the correction of market failures which enable customers to be more informed of the perfect means to conserve the environment through their consumption decisions.

Also, formulation of incentive-based instruments allows many producers to adjust their level of carbon emission since their allowances are cut off. This act encourages consumers as well to consume only energy-saving products which contribute to the protection of the environment. Hence, all these policies play a significant role in the protection of the environment by merely altering consumers' behaviors to its favor.

Reference List

Auffhammer, M., Lawell, C. L., Bushnell, J., Deschenes, O. & Zhang, J. 2018, "Chapter 4. Economic Considerations: Cost-Effective and Efficient Climate Policies," University of California Press.

Samson, A. 2018, "An Introduction to Behavioral Economics," Behavioral Science Solutions Ltd.

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Natural Resource Economics Essay. (2022, May 06). Retrieved from

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