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3. HOW CAN ECONOMICS AID IN

NATURAL RESOURCE MANAGEMENT?

SPRING 2002

Larry D. Sanders

Dept. of Ag Economics Oklahoma State University

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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.

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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

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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

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Market Failure--Benefits

Price

Quantity

P1

Q1

D=MBp

S=MCp=MCs

D’=MBsP2

Q2

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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

QuantityQ1

D=MBp=MVp=MWTPp=MBs

S=MCpS’=MCs

Q2

P2

P1

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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

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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

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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

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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

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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?

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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)

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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

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Pigouvian Tax of Negative Externality:tax output

$

OUTPUT=QQ1Q2

Tax = MEC

MCp

MCs

MBp=MBs

P1

P2

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Pigouvian Subsidy of Positive Externality--subsidy to consumer

$

OUTPUT=QQ2Q1

Subsidy = MEB

MCp

MBp

MBs

P1

P2

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Pigouvian Subsidy of Positive Externality--subsidy to producer

$

OUTPUT=QQ2Q1

Subsidy = MEB* MC subsidy

MCp

MBp

MBs

P1

P2

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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:

x1 x2

g1

g2

fish population (x)

growth of population (g)

K

0 = no growth

0 to x2 = growth

>x2 = declining growth

K = growth 0 = carrying capacity

0

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FISHERIES:OPTIMAL HARVEST

Max Sustainable Yield– C1: fish pop. declines; natural growth = harvest at x1’

& x1” – Cmsy: 1 equilibrium point; management goal

x1” x2

C1

Cmsy

population (x)

growth (g), catch (c)

Kx1’

x2’

x2”C2

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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 open-access inefficiencies

c. Aquaculture as a solution to open-access

--Limited by cultivable species

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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

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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)