Neoclassical economics of scarce resources
Summary last week
Demand <=> Price <=> Supply
"The market" as ideology and reality
Critical preconditions for the (beneficial) "functioning" of market
a) utility and profit maximization
b) full respect for property rights and contracts
c) full information on quality, quantity and price
d) full competition (no increasing returns to scale)
e) equality of resources (need versus demand)
Your comments and questions to the central text
For instance, as Solow mentions the governments’ (or better all steered policy
implications) measures are not more reliable or more future-oriented than any
other corporation. So, does the market regulate itself in a way that can be
more ecologically desirable (resource gently), than political intervention?
Well, from my understanding it absolutely can, but just because the future is
hardly foreseeable and economic conditions depend on a huge number of
complex and interconnected aspects. Anyhow, it seems that “some sort of
organized indicative planning could have a constructive role” (p. 13). ….
It comes to one’s mind that already today there seem such interventional
mechanisms be working for example in the food economy. Subventions have
created market conditions that do not anymore meet with a “ecological
equilibrium”. With this I mean especially a competitive equilibrium in an
international system. Although from my knowledge about these topics I can
just suspect that policy changes such as subventions to big farming
companies by the EU do make any equilibrium impossible if not all farmers
have the same access to such.
In the end Solow expresses – somewhat as a gesture of hope – that at least
one of the players involved in the resource market will always be rationally
bound to take the long view, in order to keep the market from collapsing.
This is however not a realistic notion, as the current development clearly
shows that no regulating force is establishing within the market itself. Solow
also mentions the importance of (mainly information-based) cooperation
between the market participants and the governments. This idea also seems
quite odd to me, as it would require an enormous degree of transparency –
something most natural resource markets are not exactly known for. In my
opinion, only harsh and radical state intervention can make a difference and
shift demand from a natural resource to its “backstop technology”. In the case
of energy-related resources such as oil, coal and gas, this would theoretically
be possible. For many other natural resources however, substitutability is
much less developed and surely in some cases not entirely possible.
Despite the many negative aspects of finite resources, they are also a quite
effective motor of innovation. Without the problem of shortage in the future,
there would be no economic incentive to produce or develop any renewable
energy technology. But there seems also to be kind of a viscous circle in this
aspect. While society tries to shift to, for example, solar energy, the
technology used forces the demand for specific and finite materials. And if
this technologies will use exhaustible material for an unforeseeable time and
if an existing rate of growth, there will be hardly a solution for this problem.
Some definitions beforehand
sink (open access => private) versus source (private?)
risk = damage * probability = cost
exploitation or substitution of resources
- costs of exploitation
- market prize of resource
- alternative use of capital depending on general interest rate
- resource: exploit now or in the future, depending on expected market prize
in the future
- problem of self-reinforcing speculation
(re)source 1 (re)source 2
remoteness factor for depth, uncertainty, hazards etc.
100
1000
1000
5000
costs ($ per ton) as a function of remoteness * technology /size
100,0
200,0
return ($ per ton) as a function of market prize minus costs
150,0
50,0
capitalized return of exploitation after one year as a function of interest rate
180,0
60,0
expected return of waiting one year as a function of expected oil price increase
162,5
62,5
size of source (tons)
profitability of exploitation (capitalized return is higher than expected result of waiting)
yes
no
general economy
technology costs (for overcoming remoteness)
general interest rate (per year)
market price for oil ($ per ton)
expected price increase for oil (per year)
1000
0,2
250
0,05
elasticity of substitution
- more efficient use of the resource also as a form of a substitute
- depending on technological development and technology acceptance
- also substitutes have environmental impacts (Daly)
ecotaxes (or tradable emission permits) on fossil fuel
- in closed circuits of exploitation and consumption
- in open circuits of exploitation and consumption (world oil market)
- who gets the tax? => governments of taxing countries
- who pays the tax? => consumers of taxing countries and fossil fuel
producers
- consequences for substitution? => will be easier / earlier
- consequences for the conservation of the resource
=> sources will become faster exploited ("green paradox")
- consequences for non-taxing consumer countries => lower prices for
fossil fuel