Chapter 11 Market Failures and Abiotic Resources

1. Chapter 11Market Failures andAbiotic Resources Geog 3890: ecological economics

2. How do markets performwith these abiotic goods and services? • Fossil Fuels (nonrenewable stock) • Minerals (partially recyclable, nonrenewable stock) • Water(nonrenwable stock, and/or fund, depending on use, recyclable) • Solar Energy (indestructible fund) • Ricardian Land (indestructible fund) • Renewable Resources (renewable stocks e.g. timber) • Ecosystem Services (renewable fund e.g. storm protection) • Waste Absorption Capacity (renewable fund) • No Natural resources meet the excludability or rivalnessor intergenerational equity criteria for efficient market allocation.

3. Fossil Fuels • Fossil fuels are both rival and excludable. In the absence of externalities, resource scarcity, intergenerational equity, the optimal allocation would be given by a simple supply and demand curve like the one at right. Why does this Curve not work?

4. Externalities & Fossil Fuels

5. MEX, MEC & MUC • Why is Gasoline really too cheap? • Well…. It should cost the Marginal Extraction cost plus the Marginal external cost plus the Marginal user cost (aka Royalty). • We dump external costs on an unwitting public and extort the royalty costs from foreign countries via ‘economic hit men’ and political and military extortion.

6. Flies in the ointment Standard Economic analysis of Fossil Fuels is inadequate. It looks only at NPV for the existing human generation, ignoring any ethical obligations to leave some for future generations, that is: It focuses on efficiency while ignoring scale and distribution. Neither producers nor consumers pay marginal external costs Empirical evidence contradicts the conventional theory (Fig 11.4 shows oil prices flat)

7. Mineral Resources • Mineral resources are also rival and excludable like Fossil Fuels - yet they also suffer from significant externalities associated with extraction and consumption. • Over 500,000 abandoned mines in the U.S. alone will cost $32-72 BILLION to clean up. • The transaction costs associated with determining who will pay will probably be more than the cleanup costs. Cool web site on Mineral and Energy Resources http://earthsci.org/education/teacher/basicgeol/resource/resource.html

8. Hard Rock Mining Externalities

9. Freshwater Changing elasticity of demand For water • The economics of water could easily fill a textbook on its own. • Water in aquifers is a nonrenewable resource similar to fossil fuels with fewer externalities. • Water can also be an ecological fund-service similar to ecosystem services. • Here water will be discussed as a stock – flow resource.100% essential to human survival with no substitutes. • Water distribution systems show substantial economies of scale. • Increasing move toward privatization of municipal water supplies around the world • Because water is 100% essential and has no substitute EE says just distribution should have precendent over efficient allocation.

10. Two serious economic problems with Water • Distribution: In the market economy, the most “efficient’ use is that use which creates the highest value, and value is measured by willingness to pay. In a world with grossly unequal income distribution and a growing relative scarcity of water, many people have very limited means to pay. “Perfect” market allocation of water could easily lead to circumstances in which a rich person could pay more to water a lawn than a poor family could pay to water the crops it needs to survive. While economically a green lawn migh be more efficient, ethically most people would probably agree that survival of the poor should take precedence. • Efficiency: Markets are rarely perfect, and, in the case of water, they are likely to be less perfect than most. Providing water requires substantial infrastructure that would be very costly to duplicate. For this reason it makes sense to have only one provider, so even where water is privatized, there is typically not a competitive market but rather a natural monopoly. A natural monopoly occurs when the marginal cost of production is decreasing, which is the case for many public utilities. Dealing with inelastic demand, the monopoly provider knows that a 10% increase in price will lead to less than a 10% decrease in quantity demanded, leading to higher revenue and lower costs. And, everyone needs water and cannot exit the market no matter how inefficient and expensive the monopoly suppler is. With no threat to their market share, firms become bent on maximizing short-term profit may delay needed imrovements in infrastructure. Only extensive regulation will deter the private supplier from increasing prices and decreasing quality. With no competition to drive down prices , nor regulation to control costs, private sector provision of water is likely to be less efficient than public sector provision – as well as less just.

11. Ricardian Land • The truth is that land attains value as a positive externality of the decisions of others. Land values thus result from a market failure, and we cannot simply assume that markets are the best means for allocating even Ricardian Land. • Land value and Government “Takings” and “Givings” • Fixed Supply & Growing Demand. Whoever owns land will accrue wealth through no effort of their own.

12. Solar Energy • Supply and allocation cannot be changed. • Ecosystems appear to be getting degraded in their ability to absorb and store solar energy. • Land is the essential substrate for the capture of solar energy. Because of this solar energy is in a sense rival and excludable.

14. Ode to Henry George • Do a nice page on Henry George some day.