Natural Resources and the Future

1. Natural Resources and the Future 6 13 10 5

2. Natural Resource Markets

3. Natural Resource Markets • In resource markets, as in other markets, incentives matter. • Both the quantity demanded of a resource and the quantity supplied depend on the resource price. • Substitutes abound and they influence the elasticity of both demand and supply. • As in other markets, demand and supply in resource markets are generally more elastic in the long run than the short run.

4. 100 % 100 % 100 % 100 % 100 % 63 % 56 % 54 % 50 % 46 % Water use per unit of output1985 = 100 1985 1989 Aircraft &parts industry Electroniccomponents Motor vehicles& equipment Office &computer equipment Paints Source: Cost of Industrial Water Shortages, California Urban Water Agencies, 1991; Executive Summary, Table 1-1. Prices and the Industrial Use of Water • As water prices and the uncertainties of future availability increased during the 1986-1989 drought in California, industrial users cut back on their usage. • Water used per unit of output declined by almost 50 % in several key industries. When the use of water is expensive, people find ways to use less. • The “need” for a resource is influenced by its price.

5. ––– Estimated Elasticity ––– Fuel Short-Run Long-Run Source: Douglas R. Bohi, Analyzing Demand Behavior (Baltimore: Johns Hopkins University Press, 1981), pp. 159. Price Responsiveness of Energy Forms: Estimated Price Elasticities of Demand • Recall that demand elasticities represent the ratio of a percent change in the price to a percent change in the quantity demanded given that other factors are held constant. Residential Electricity 0.2 0.7 Residential Natural Gas 0.1 0.5 Gasoline 0.2 0.7 • Note that demand for the fuels listed above is inelastic in the short-run. This reflects the inability of consumers to easily and quickly find substitutes for these fuels. • In the long run, prices will encourage innovation and substitution. The result: the demand for energy is more elastic in the long run.

6. 490 120 Technology and Output: Cropland Cropland Needed for 1993 Level of U.S. Food Production (millions of hectacres) Actual with1993 technology Needed with1910 technology Source: Indur Goklany, “Factors Affecting Environmental Impacts: The Effect of Technology on Long-term Trends in Cropland, Air Pollution, and Water-related Diseases.” Ambio, vol. 25, no. 8 (Dec. 1996), p. 498. • Improvements in technology have increased productivity in agriculture. Thus, less cropland is now needed to produce any given level of output.

7. Property Rights and Resource Conservation

8. Property Rights and Resource Conservation • Private resource ownership is important for resource conservation because it: • Is necessary for the wide, but controlled, access encouraged by the market process, • Provides an incentive for resource stewardship, • Gives owners legal standing against those who would overuse or harm the resource, • Gives future users a voice in today’s markets through the capital value of resource assets. • This is especially important from the viewpoint of resource conservation and the quality of the environment.

9. Property Rights and Resource Conservation • Even corporate managers have a strong incentive to look to the future. • Corporate officers may be concerned mainly about the short term, but if today’s decision reduces future profits, it will reduce the price of the firm’s stock today. • The firm’s board of directors, which hires and fires the top managers, is typically dominated by large shareholders, who are quite sensitive to changes in the price of the firm’s stock.

10. The Endangered Species Act: Unwanted Secondary Effects from Weaker Property Rights

11. The Endangered Species Act: Unwanted Secondary Effects from Weaker Property Rights • The ESA severely weakened the property rights of landowners by giving the U.S. Fish and Wildlife Service (FWS) the power to prohibit any land use by private owners that might disturb the habitat of any animal species listed as threatened or endangered. • Colonies of many listed species have benefited from this control, but it can be very costly to the affected landowners, and the signals and incentives normally provided by prices are missing.

12. The Endangered Species Act: Unwanted Secondary Effects from Weaker Property Rights • As a result, landowners often adjust land management in subtle ways to make their land unattractive to the listed species. • the unwanted secondary effect of the ESA has been a substantial reduction in habitat for various endangered species. • Regulations that weaken property rights make it difficult to discover low cost means of resource conservation.

13. Resource Markets vs. Resource Depletion

14. Resource Markets vs. Resource Depletion • Neither economic analysis nor empirical evidence supports the view that the world is about to run out of key natural resources. • With private property rights, increased scarcity of a natural resource increases the resource price and thereby encourages • conservation, • use of substitutes, and, • new technologies that enhance supply and reduce the demand for the resource. • Contrary to the doomsday view, the real prices of most natural resources have been declining during the last century.

15. Questions for Thought: 1. Demand for energy in the long run is usually a. less elastic than in the short run. b. more elastic than in the short run. c. perfectly inelastic because we must have energy to survive. 2. “There is a finite quantity of natural resources like crude oil. It is only a matter of time before it is exhausted.” -- Is this true? 3. "Since our national forests are owned by all the people, their resources will be conserved for the benefit of all, rather than exploited in a short-sighted way, to produce benefits only for the owners." -- Evaluate this statement.

16. Questions for Thought: 4. Does a resource that is not owned, and therefore is not priced, have a zero opportunity cost? Might it be treated as if it did? 5. Predictions of severe shortages due to impending natural resource depletion a. are widely accepted by economists even though such forecasts are a relatively new occurrence. b. have been wrong in the past, but most economists believe that the threat of resource depletion is now far more severe. c. are typically made without adequate recognition and consideration of resource price elasticities of demand.

17. Questions for Thought: 6. Property rights and legal liability are at their best in protecting resources when a. there are many sources of pollution and many resources harmed, as in the Los Angeles air pollution basin. b. there is a single pollution source and only a small number of resource owners that are harmed. c. pollution damage may be large but the damages and perpetrators are difficult to determine.

18. EndSpecial Topic 13