3.
HOW CAN ECONOMICS AID IN
NATURAL RESOURCE MANAGEMENT?
SPRING 2002
Larry D. Sanders
Dept. of Ag Economics
Oklahoma State University
1
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.
2
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
3
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
4
Market Failure--Benefits
S=MCp=MCs
Price
P2
D’=MBs
P1
D=MBp
Quantity
Q1 Q2
5
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
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Market Failure--Costs
Price
S’=MCs
S=MCp
P2
D=MBp=MVp=MWTPp=MBs
Quantity
P1
Q2 Q1
7
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)]
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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
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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.)
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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
11
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
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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
13
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
14
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
15
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
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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?
17
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,
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marketable permits)
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
19
Pigouvian Tax of Negative Externality:
tax output
MCs
$
MCp
P2
Tax =
MEC
P1
MBp=MBs
Q2
Q1
OUTPUT=Q
20
Pigouvian Subsidy of Positive
Externality--subsidy to consumer
$
Subsidy
= MEB
MCp
P2
P1
MBs
MBp
Q1
Q2
OUTPUT=Q
21
Pigouvian Subsidy of Positive
Externality--subsidy to producer
$
MCp
Subsidy
= MEB*
P1
MC subsidy
P2
MBs
MBp
Q1
Q2
OUTPUT=Q
22
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
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FISHERIES: BACKGROUND
 MARKET
FAILURE:
– Overfishing
– Pollution
– Local/regional impacts
 Commercial Populations down
 Global Trends of Concern
 Recreation Fishing Important
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FISHERIES: BIOLOGY
 Appropriate
Habitat w/food & oxygen
 Reproduction = f(population size, habitat)
 Logistic Growth Function:
growth of
population (g)
g2
0 = no growth
0 to x2 = growth
>x2 = declining
growth
g1
0
x1
K
x2
fish population (x)
K = growth 0 =
carrying capacity
25
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
x2” x1”
K
x2
x1’
population (x)
x2’
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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
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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 openaccess inefficiencies
c. Aquaculture as a solution to open-access
--Limited by cultivable species
28
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) &
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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)
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