Market Failures and Abiotic Resources

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Market Failures and Abiotic Resources
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Review

• Fund-service vs. stock-flow resources
• Rival, non-rival but congestible, non-rival,
  anti-rival
• Whats the relationship between rivalness and
  fund-service, stock-flow distinction
• Excludable and non-excludable

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Todays Topics

• Fossil fuels and minerals
• Fresh Water
• Land
• Preferences for what to cover?

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AND MINERALS
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Are These Market Goods?

• Excludable
• Rival
• What about between generations?
• Resource Exhaustibility A Myth Refuted by
  Entrepreneurial Capital Maintenance
• By John Brätland
• What about alternatives to fossil fuels?
• What is the rule for efficient production of
  market goods?

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How Important are Fossil Fuels?

• Are they essential to modern civilization?
• What are some of their critical uses?
• Wealth of Nations and patent on steam engine
• 20,000 hours of work in a barrel of oil
• Extremely high energy return on energy invested
• Are there any suitable substitutes to
  conventional oil?
• Have we developed more substitutes or more
  complements since 1869?
• What do we know about their demand curve?

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Negative Externalities degradation of public
goods

• What are some of the externalities?
• How serious are they?
• Are they affecting things that are essential?
• Are they affecting things with no substitutes?
• How long do they last?
• What is more essential and non-substitutable,
  fossil fuels or the things they degrade?
• At what spatial scales do they occur?
• At what temporal scales?

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User Cost The Value Arising from Scarcity

• What would be a fair price for oil if it were
  infinite?
• What is the opportunity cost of extracting oil
  today?
• User cost the opportunity cost of
  non-availability of a natural resource at a
  future date that results from using up the
  resource today rather than keeping it in its
  natural state.
• Marginal user cost is the value of one more unit
  of the resource in its natural state the
  opportunity cost of extracting one more unit
  today instead of in the future.
• What does marginal user cost equal in a perfectly
  competitive economy?
• The concept of RENT (royalties) and VCAT

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User Cost The Value Arising from Scarcity

• Whats the opportunity cost of not extracting
  oil?
• The Hotelling rule balancing opportunity costs
• Backstop technology
• What impact should user cost have on rates of
  extraction?
• What impact does it have?
• Why?

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Can you explain why, in a competitive market,
producers would pay resource owners a per-unit
fee equal to the MUC for the right to extract a
resource? Why dont we do this? What are the
obstacles?
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Flaws in the NCE analysis

• Maximizes NPV, ignores future generations
• No one pays external costs (generally receive
  subsidies instead)
• Empirical evidence contradicts it

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Alternative Explanations

• Mayflower effect
• Information effect
• Scarcity effect
• What should we expect?

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How Big is the Energy Challenge?

• What is current energy usage?
• What will it be by 2050?
• What percent is fossil fuels?
• How much do we need to reduce carbon emissions to
  stabilize the climate?
• What are the alternatives?
• What do we need to produce them?
• Are the alternatives market or non-markets?
• How much energy can we get from them?
• What do we do?

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Fresh Water
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Characteristics of Water

• Stock-flow or Fund-service?
• We treat it here as a stock-flow. Examples?
• Renewable or exhaustible?
• Aquifers?
• Surface water?

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Whats the demand curve look like?
How does this compare with a conventional demand
curve?
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Will markets allocate water towards its best use?

• What is the best use?
• How do markets decide who gets to use something?
• What are the implications of income distribution
  with respect to the efficient allocation of water
  towards its best uses?

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Will markets allocate water efficiently?

• Problem of natural monopoly
• How do monopolists maximize profits?
• Current policies concerning water
• Discussion of externalities, user cost (for
  fossil aquifers), rent, also applies
• Big issue for VCAT, also relevant to watershed
  management

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Ricardian Land

• What is Ricardian Land?
• What creates the value in Ricardian land?
• Farmland?
• Urban land?
• Location, location, location
• Positive externalities
• How much of the value of Ricardian land is rent?
• Whats the supply curve for Ricardian land?

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Relevance to Projects?
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Speculative Bubbles

• The current mortgage crisis
• Asian flu
• Japans economic collapse
• Impact on business cycle
• How do we avoid these?