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Chapter 13. Generalized Resource Scarcity. 13.1 Introduction. Main contents:
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Chapter 13 Generalized Resource Scarcity
13.1 Introduction • Main contents: • Review and elaborate the manner in which a market economy copes with increasing scarcity, particularly the roles of exploration and discovery, technological progress, and the substitution of abundant resources for scarce ones. • Examine how resource scarcity can be detected? What indicators can be used? What are their strengths and weaknesses? • Discuss how the evidence revealed by these indicators may be interpreted.
13.2 Factors Mitigating Resource Scarcity • Exploration and discovery • Technological progress • Substitution
Exploration and discovery • A profit-maximizing firm will undertake exploration activity until the marginal discovery cost equals the marginal scarcity rent received from a unit of the resource sold.
Exploration and discovery • How would exploration activity would respond to population and income growth? • Since both of these factors contribute to rising demand over time, they raise the marginal user cost and the scarcity rent, stimulating producers to undertake larger marginal discovery costs.
Exploration and discovery • How much the demand pressure is relieved depends upon the amount of exploration activity and the amount of resources discovered per unit of exploration activity undertaken. • If the marginal discovery cost curve is flat ,increases in scarcity rent can stimulate large amounts of successful exploration activity. • If the marginal discovery cost curve is steeply sloped, increases in scarcity rent stimulate less successful exploration activity.
Technological progress • Rising extraction costs create new profit opportunities for the development of new technologies. These profit opportunities are largest for technologies that economize on scarce resources and utilize abundant ones. • In periods when labor is scarce and capital abundant, new technologies tend to use capital and save labor. • If population growth were to reverse the relative scarcity, subsequent technological progress would concentrate on using labor and saving capital.
Substitution • The final way in which adverse consequences of resource scarcity can be mitigated is by substituting abundant resources for scarce ones.
13.3 Detecting Resource Scarcity • 13.3.1 Criteria for an ideal scarcity Indicator • 13.3.2 Applying the criteria
13.3.1 Criteria for an ideal scarcity Indicator • An ideal indicator would have at least the three following properties: • Foresight • Comparability • Computability
13.3.2 Applying the criteria • The physical indicators • Resource prices • Scarcity rent • Marginal discovery cost • Marginal extraction cost
The physical indicators • Both the static and exponential versions of the reserve-to-use ratios result in a number that can be conveniently interpreted as the time until exhaustion. On the surface, this indicator appears to satisfy all three of our criteria.
The physical indicators • While reserve –to –use ratios are forward-looking, their view of the future is a narrow one on several count. • Their derivation makes no provision for stock augmentation. • Reserve –to –use rations do allow comparisons to be made, but the resulting rankings provide no guide to the seriousness of the problems. • Reserve –to –use ratios are also powerless to draw conclusions about the seriousness of renewable resource scarcity. • The outstanding virtue of the reserve –to –use ratio is that it is readily calculated from published data.
Resource prices • Current prices are forward –looking . They are affected by such factors as: • Rising demand • The possibilities for stock augmentation • Substitution • Changes in the cost of extraction • The price elasticity of demand
Resource prices • The problem with using trends in efficient resource prices as the sole indicator is that in certain markets they are not directly observable or calculable. This occurs whenever the market price is not equal to the efficient price. For example: • Common-property resource markets • Markets with government price controls or artificial subsidies. • Markets with significant externalities which have not been internalized.
Scarcity rent • Scarcity rent is the payment accruing to a resource owner when the user cost is positive. • Scarcity rent can be used as an indicator for both renewable and depletable resource scarcity.
Scarcity rent • To interpret the behavior of scarcity rent, we need to know the underlying structure of extraction costs. • For depletable resources having a constant marginal cost of extraction, we expect scarcity rent to rise with the depletion. • When extraction costs rise with the amount extracted, scarcity rent should decline with increasing scarcity.
Marginal discovery cost • We noted that marginal discovery cost, which can be observed ,should be equal to marginal scarcity rent. • Therefore, marginal discovery cost can be used as a proxy for marginal scarcity rent when information on discovery cost is available and information on scarcity rent is not.
Marginal extraction cost • Rising marginal extraction cost should serve as a signal of the amount of sacrifice needed to procure each unit of the resource. • It is noteworthy that the usefulness of this indicator of scarcity is not undermined when the resources are treated as common property. Thus , it is perhaps the best indicator to be used for common-property resources.
Marginal extraction cost • However, extraction cost is far from a flawless indicator. • Extraction cost is the only one which does not fulfill the foresight criterion. • Unit extraction cost is also a difficult concept to measure precisely with published information.
13.3.2 Applying the criteria • In conclusion, no indicator of resource scarcity dominates the others in all cases. • Trends in real resource prices probably dominate in efficient markets. • Scarcity rent trends probably dominate in those market where the common –property problem does not exist and where the values of the in situ resources are routinely collected. • Marginal discovery cost trends may usefully approximate marginal scarcity rent when it is not directly observable. • Trends in the cost of extraction are superior for those resources treated as common property.
