3 . HOW CAN ECONOMICS AID IN NATURAL RESOURCE MANAGEMENT?

1. 3. HOW CAN ECONOMICS AID IN NATURAL RESOURCE MANAGEMENT? SPRING 2002 Larry D. Sanders Dept. of Ag Economics Oklahoma State University

2. INTRODUCTION • Purpose: to understand economic tools/concepts that can be applied to natural resource management • Learning Objectives: 1. To understand the concept of externalities & how it shows that markets fail to protect environmental quality. 2. Provide a summary overview of the economics of natural resource systems.

3. Market Failure • Inefficient allocation of resources • MBp = MCp; MBs = MCs • Marginal External Cost = MEC = MCs-MCp • Marginal External Benefit = MEB = MBs-MBp • Sources • Imperfect Competition (market power) • Imperfect Information • Public Goods--property rights not assigned • Externalities--costs/benefits that don’t accrue to economic unit that creates them

4. Externalities • Positive Externality: benefit gained by those outside the decisionmaking economic unit & no compensation returned (called external benefits) • MBp < MBs • Government intervention (subsidy of buyers or sellers) may approximate increase in MBp leading to MBp = MBs • Example: private forest vs. public forest

5. Market Failure--Benefits S=MCp=MCs Price P2 D’=MBs P1 D=MBp Quantity Q1 Q2

6. Externalities (cont) • Negative Externality: cost to others (losers) outside the decisionmaking economic unit that is uncompensated (called external costs) • equivalent to a producer subsidy • MCp < MCs • Government intervention (tax) may increase MCp, leading to MCp = MCs • Examples: • production practices that cause soil erosion • pollution from steel mill or hog facility

7. Market Failure--Costs S’=MCs S=MCp Price P2 D=MBp=MVp=MWTPp=MBs P1 Quantity Q2 Q1

8. Market Efficiency Issues • Equity • Efficiency may not be Equitable • Distribution may be a problem • “Best” is determined by Society • Dynamic Efficiency • Static: 1 time period or multiple time periods independent of each other • Dynamic: Multiple time periods, dependent on each other [Pt+1 = f (x,y, Pt, z)]

9. Market Failure & Property Rights • A reason for MCs = MBs: Property Rights • Property Rights--Defined by Society • Clean Air/Water? • Private Property? • Open-Access Externality: • Property Rights insufficient or unenforceable to prevent general use, leading to destruction/diminishment/damage of resource

10. Institutional Factors of Property Rights • Institutional Arrangements • Property (assumes rights to possession & use of economic objects w/govt. rules for ownership, transfer, use, etc.) • Private vs. Common Property (Common-Pool) • Limited rights (land, water, minerals, air space, time share, etc.) • Development (zoning, building, flood control, homestead, permit markets, taxes, court injunctions, eminent domain, etc.)

11. Institutional Factors (continued): • Property rights for Land--Fee Simple Ownership • Rights of Owner to: Possess/use, Sell/Lease, Devise (pass to heirs), Mortgage, Subdivide, Grant Easements, Sue for damages • Rights of Govt. to: Tax, Take for public use (eminent domain), Control use of (police power), Escheat (reversion to state at death) • Rights are exclusive, not absolute • Rights evolve in court cases & law • Rights carry legal & ethical responsibilities

12. Property Rights & the “Takings” Issue • Regulatory takings: when government rules/regs restrict the normal use/rights of private property owners • Private sector takings: when private property owners alter an ecosystem to the extent it threatens/endangers the existence of plant or animal species

13. Open Access (ownership not assigned) • Common law of capture • No duties • Examples: Ocean resources beyond national boundaries; Atmosphere • Common law may provide for punishment for pollution if national/international regulations in place

14. Common Pool Resources (CPRs) • Difficult to exclude multiple persons from use • Resource taken by one user not available to others (rivalry in consumption) • In absence of rules, users will over-use CPR • Efficient level of appropriation: MC = MRP

15. CPR (cont) • Natural resources or areas held in common by a group (typically the public) of the community, state, region or nation, rather than by a private entity; collective property, open access (occasionally rules of use) • Examples: • national parks, forests, wilderness, wild/scenic rivers • communal pastures/parks, waterways/sources

16. CPR/Common Property: Background & Issues • Resources to which all members of a given society/group have co-equal rights of use • may require licenses or permits • may impose quotas • government acts as a trustee • Historically, concept grew from common fishing, hunting, grazing lands • customs, traditions, taboos, fission must evolve to prevent depletion of resources (Native Americans; African tribes) • commercial movement eroded commons in Europe

17. Common Property (continued) • Fisheries, wild game, grazing, forest, public recreational land, salt marshes, beaches, ocean bottoms, navigable inland waterways remain largely common property • Key problem: overuse/externalities require government intervention • Key policy issues: 1. Which policy tools most appropriate? 2. What is the optimal level of common property resource?

18. Government Intervention Alternatives to Resolve Market Failure 1. Moral Suasion (“jawboning”)--govt. statements that correcting market failure is “moral” (woodsy owl, smokey the bear) 2. Govt. Production of Environmental Quality --plant trees, stock fish, treat sewage 3. Command/Control Regulations--constraints w/penalties/fines (pesticide use labels, catalytic converters, feedlot & lagoon regs) 4. Economic Incentives--make self-interest coincide w/social interest (pollution tax/subsidy, marketable permits)

19. Pigou vs. Coase • Pigouvian Tax/Subsidy • corrects externalities that create MBs = MCs by internalizing costs (tax emission)/benefits • Tax = MCs-MCp • Subsidy = MBs-MBp • Coase Theorem • externality unnecessary & undesirable • let market determine optimal level of externality • assumes transaction costs are small & property rights allocation not important

20. Pigouvian Tax of Negative Externality:tax output MCs $ MCp P2 Tax = MEC P1 MBp=MBs Q1 Q2 OUTPUT=Q

21. Pigouvian Subsidy of Positive Externality--subsidy to consumer $ MCp Subsidy = MEB P2 P1 MBs MBp Q2 Q1 OUTPUT=Q

22. Pigouvian Subsidy of Positive Externality--subsidy to producer $ MCp Subsidy = MEB* MC subsidy P1 P2 MBs MBp Q2 Q1 OUTPUT=Q

23. Economic Incentives to Improve Natural Resource/Environmental Quality • Marketable Pollution Permits • Trade permits in market to equate MC across polluters • Initial distribution • history, auction, lottery • equity & geographic concerns • Bonding Systems • Liability Systems • Pollution Subsidies

24. FISHERIES: BACKGROUND • MARKET FAILURE: • Overfishing • Pollution • Local/regional impacts • Commercial Populations down • Global Trends of Concern • Recreation Fishing Important

25. FISHERIES: BIOLOGY • Appropriate Habitat w/food & oxygen • Reproduction = f(population size, habitat) • Logistic Growth Function: growth of population (g) 0 = no growth 0 to x2 = growth g2 >x2 = declining growth g1 K = growth 0 = carrying capacity 0 K x1 x2 fish population (x)

26. FISHERIES:OPTIMAL HARVEST • Max Sustainable Yield • C1: fish pop. declines; natural growth = harvest at x1’ & x1” • Cmsy: 1 equilibrium point; management goal growth (g), catch (c) Cmsy C1 C2 K x1” x2 x1’ x2” population (x) x2’

27. FISHERIES: Open-Access (do not explicitly address entry problem) 1. Modify fishing behavior w/o directly affecting participation (increase cost); may restrict: --Catch methods --Which fish --Harvest time --Location --Number

28. FISHERIES: OPEN-ACCESS (cont) 2. Economic Analysis: a. Regulations --> Increase Costs --compliance makes per fish costs higher b. Regulations --> Decrease Costs --success of restrictions may increase population, may lead to higher catch per attempt --this reduces average cost, worsening open-access inefficiencies c. Aquaculture as a solution to open-access --Limited by cultivable species

29. FISHERIES: LIMITED-ENTRY 1. Raise fisher costs, not social costs --Similar to pollution control 2. Per unit tax 3. Marketable catch quota 4. Limit number of boats or fishers --Auction or history --Virginia oyster fishery--private property --UN economic exclusion zone--200-mi. limit 5. Resistance: Informal (close-knit communities) & Utility maximizers vs. Profit maximizers

30. FISHERIES: RELATED ISSUES • INCIDENTAL CATCH • Gill nets, long-lining • Economic incentives vs. regulation • HABITAT POLLUTION • Most freshwater & many saltwater species • 3d World: soil erosion & human waste • RECREATIONAL FISHERY MANAGEMENT • Open-access problems • Stocking, closed seasons, improvements, catch/release, size limits (CVM, TCM, UD)