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Market Failures and Abiotic Resources

Market Failures and Abiotic Resources. Review. Fund-service vs. stock-flow resources Rival, non-rival but congestible, non-rival, anti-rival What’s the relationship between rivalness and fund-service, stock-flow distinction Excludable and non-excludable. AND MINERALS.

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Market Failures and Abiotic Resources

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  1. Market Failures and Abiotic Resources

  2. Review • Fund-service vs. stock-flow resources • Rival, non-rival but congestible, non-rival, anti-rival • What’s the relationship between rivalness and fund-service, stock-flow distinction • Excludable and non-excludable

  3. AND MINERALS

  4. Are These Market Goods? • Excludable • Rival • What about between generations? • Resource Exhaustibility: A Myth Refuted by Entrepreneurial Capital Maintenance By John Brätland • What is the rule for efficient production of market goods?

  5. How Important are Fossil Fuels? • Are they essential to modern civilization? • What are some of their critical uses? • Wealth of Nations and patent on steam engine • 20,000 hours of work in a barrel of oil • Extremely high energy return on energy invested • Are there any suitable substitutes to conventional oil? • Have we developed more substitutes or more complements since 1869? • What do we know about their demand curve?

  6. Negative Externalities = degradation of public goods • What are some of the externalities? • How serious are they? • Are they affecting things that are essential? • Are they affecting things with no substitutes? • How long do they last? • What is more essential and non-substitutable, fossil fuels or the things they degrade? • At what spatial scales do they occur?

  7. User Cost: The Value Arising from Scarcity • What is the opportunity cost of extracting oil today? • User cost: the opportunity cost of nonavailability of a natural resource at a future date that results from using up the resource today rather than keeping it in its natural state. • Marginal user cost is the value of one more unit of the resource in its natural state; the opportunity cost of extracting one more unit today instead of in the future. • What does marginal user cost equal in a perfectly competitive economy? • The concept of RENT (royalties) and VCAT

  8. User Cost: The Value Arising from Scarcity • What’s the opportunity cost of not extracting oil? • The Hotelling rule: balancing opportunity costs • Backstop technology, discounting and time to • What impact should user cost have on rates of extraction? • What impact does it have? • Why?

  9. Can you explain why, in a competitive market, producers would pay resource owners a per-unit fee equal to the MUC for the right to extract a resource? Why don’t we do this? What are the obstacles?

  10. Flaws in the NCE analysis • Maximizes NPV, ignores future generations • No one pays external costs (generally receive subsidies instead) • Empirical evidence contradicts it

  11. Alternative Explanations • Mayflower effect • Information effect • Scarcity effect • What should we expect?

  12. Fresh Water

  13. Characteristics of Water • Stock-flow or Fund-service? • We treat it here as a stock-flow. Examples? • Renewable or exhaustible? • Aquifers? • Surface water?

  14. What’s the demand curve look like? How does this compare with a conventional demand curve?

  15. Will markets allocate water towards its best use? • What is the best use? • How do markets decide who gets to use something? • What are the implications of income distribution with respect to the efficient allocation of water towards its best uses?

  16. Will markets allocate water efficiently? • Problem of natural monopoly • How do monopolists maximize profits? • Current policies concerning water • Discussion of externalities, user cost (for fossil aquifers), rent, also applies • Big issue for VCAT, also relevant to watershed management

  17. Ricardian Land • What is Ricardian Land? • What creates the value in Ricardian land? • Farmland? • Urban land? • Location, location, location • Positive externalities • How much of the value of Ricardian land is rent? • What’s the supply curve for Ricardian land?

  18. Relevance to Projects?

  19. Speculative Bubbles • The current mortgage crisis • Asian flu • Japan’s economic ‘collapse’ • Impact on business cycle • How do we avoid these?

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