3 how can economics aid in natural resource management n.
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  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)