Chapter 11Chapter 11

Market Failures andMarket Failures andAbiotic ResourcesAbiotic Resources

Geog 3890: ecological Geog 3890: ecological economicseconomics

How do markets performHow do markets performwith these abiotic goods and with these abiotic goods and

services?services?► Fossil Fuels Fossil Fuels (nonrenewable stock)(nonrenewable stock)► MineralsMinerals (partially recyclable, nonrenewable stock) (partially recyclable, nonrenewable stock)► WaterWater (nonrenwable stock, and/or fund, depending on use, recyclable)(nonrenwable stock, and/or fund, depending on use, recyclable)

► Solar EnergySolar Energy (indestructible fund) (indestructible fund)► Ricardian Land Ricardian Land (indestructible fund)(indestructible fund)► Renewable Resources Renewable Resources (renewable stocks e.g. timber)(renewable stocks e.g. timber)► Ecosystem Services Ecosystem Services (renewable fund e.g. storm protection)(renewable fund e.g. storm protection)► Waste Absorption Capacity Waste Absorption Capacity (renewable fund)(renewable fund)

► No Natural resources meet the excludability or rivalness or No Natural resources meet the excludability or rivalness or intergenerational equity criteria for efficient market allocation.intergenerational equity criteria for efficient market allocation.

Fossil FuelsFossil Fuels►Fossil fuels are both rival and excludable. Fossil fuels are both rival and excludable.

In the absence of externalities, resource In the absence of externalities, resource scarcity, intergenerational equity, the scarcity, intergenerational equity, the optimal allocation would be given by a optimal allocation would be given by a simple supply and demandsimple supply and demand

curve like thecurve like the

one at right.one at right.

Why does thisWhy does this

Curve not work?Curve not work?

Externalities Externalities & Fossil Fuels& Fossil Fuels

MEX, MEC & MEX, MEC & MUCMUC

► Why is Gasoline really Why is Gasoline really too cheap? too cheap?

► Well…. It should cost the Well…. It should cost the Marginal Extraction cost Marginal Extraction cost plus the Marginal plus the Marginal external cost plus the external cost plus the Marginal user cost (aka Marginal user cost (aka Royalty).Royalty).

► We dump external costs We dump external costs on an unwitting public on an unwitting public and extort the royalty and extort the royalty costs from foreign costs from foreign countries via ‘economic countries via ‘economic hit men’ and political hit men’ and political and military extortion.and military extortion.

Flies in the ointmentFlies in the ointmentStandard Economic analysis Standard Economic analysis of Fossil Fuels is of Fossil Fuels is inadequate. It looks only at inadequate. It looks only at NPV for the existing human NPV for the existing human generation, ignoring any generation, ignoring any ethical obligations to leave ethical obligations to leave some for future some for future generations, that is:generations, that is:

1)1)It focuses on efficiency It focuses on efficiency while ignoring scale and while ignoring scale and distribution. distribution.

2)2)Neither producers nor Neither producers nor consumers pay marginal consumers pay marginal external costsexternal costs

3)3)Empirical evidence Empirical evidence contradicts the contradicts the conventional theory conventional theory (Fig 11.4 shows oil prices flat)(Fig 11.4 shows oil prices flat)

Mineral Mineral Resources Resources

► Mineral resources are also rival Mineral resources are also rival and excludable like Fossil and excludable like Fossil Fuels - yet they also suffer Fuels - yet they also suffer from significant externalities from significant externalities associated with extraction and associated with extraction and consumption.consumption.

► Over 500,000 abandoned Over 500,000 abandoned mines in the U.S. alone will mines in the U.S. alone will cost $32-72 BILLION to clean cost $32-72 BILLION to clean up. up.

► The transaction costs The transaction costs associated with determining associated with determining who will pay will probably be who will pay will probably be more than the cleanup costs. more than the cleanup costs.

Cool web site on Mineral and Energy Resourceshttp://earthsci.org/education/teacher/basicgeol/resource/resource.html

Hard Rock Mining Hard Rock Mining ExternalitiesExternalities

FreshwaterFreshwater► The economics of water could easily fill a The economics of water could easily fill a

textbook on its own. textbook on its own. ► Water in aquifers is a nonrenewable Water in aquifers is a nonrenewable

resource similar to fossil fuels with fewer resource similar to fossil fuels with fewer externalities.externalities.

► Water can also be an ecological fund-Water can also be an ecological fund-service similar to ecosystem services.service similar to ecosystem services.

► Here water will be discussed as a stock – Here water will be discussed as a stock – flow resource.flow resource. 100% essential to human 100% essential to human survival with no substitutes.survival with no substitutes.

► Water distribution systems show Water distribution systems show substantial economies of scale.substantial economies of scale.

► Increasing move toward privatization of Increasing move toward privatization of municipal water supplies around the worldmunicipal water supplies around the world

► Because water is 100% essential and has Because water is 100% essential and has no substitute EE says just distribution no substitute EE says just distribution should have precendent over efficient should have precendent over efficient allocation.allocation.

Changing elasticity of demandFor water

Two serious economic problems with WaterTwo serious economic problems with Water► Distribution: Distribution: In the market economy, the most “efficient’ use is that use which 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 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, 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 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 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 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 economically a green lawn migh be more efficient, ethically most people would probably agree that survival of the poor should take precedence.probably agree that survival of the poor should take precedence.

► EfficiencyEfficiency: Markets are rarely perfect, and, in the case of water, they are likely to : 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 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 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 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 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 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% 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, 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 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. 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 With no threat to their market share, firms become bent on maximizing short-term profit may delay needed imrovements in infrastructure. Only extensive regulation profit may delay needed imrovements in infrastructure. Only extensive regulation will deter the private supplier from increasing prices and decreasing quality. With 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 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 provision of water is likely to be less efficient than public sector provision – as well as less just.as less just.

Ricardian LandRicardian Land► The truth is that land attains value The truth is that land attains value

as a positive externality of the as a positive externality of the decisions of others. Land values decisions of others. Land values thus result from a market failure, thus result from a market failure, and we cannot simply assume that and we cannot simply assume that markets are the best means for markets are the best means for

allocating even Ricardian Land.allocating even Ricardian Land.

► Land value and Government Land value and Government “Takings” and “Givings”“Takings” and “Givings”

► Fixed Supply & Growing Demand. Fixed Supply & Growing Demand. Whoever owns land will accrue Whoever owns land will accrue wealth through no effort of their wealth through no effort of their own. own.

Solar EnergySolar Energy► Supply and allocation Supply and allocation

cannot be changed. cannot be changed. ► Ecosystems appear to Ecosystems appear to

be getting degraded in be getting degraded in their ability to absorb their ability to absorb and store solar energy.and store solar energy.

► Land is the essential Land is the essential substrate for the substrate for the capture of solar capture of solar energy. Because of this energy. Because of this solar energy is in a solar energy is in a sense rival and sense rival and excludable.excludable.

Ode to Henry GeorgeOde to Henry George

►Do a nice page on Henry George some Do a nice page on Henry George some day.day.