3' HOW CAN ECONOMICS AID IN NATURAL RESOURCE MANAGEMENT

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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 dont 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 lt 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
SMCpMCs
Price
P2
DMBs
P1
DMBp
Quantity
Q1
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 lt 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
SMCs
SMCp
Price
P2
DMBpMVpMWTPpMBs
P1
Quantity
Q2
Q1
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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 Pt1 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 Externalitytax output
MCs

MCp
P2
Tax MEC
P1
MBpMBs
Q1
OUTPUTQ
Q2
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Pigouvian Subsidy of Positive Externality--subsidy
to consumer

MCp
Subsidy MEB
P2
P1
MBs
MBp
Q2
OUTPUTQ
Q1
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Pigouvian Subsidy of Positive Externality--subsidy
to producer

MCp
Subsidy MEB
MC subsidy
P1
MBs
P2
MBp
Q2
OUTPUTQ
Q1
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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

growth of population (g)
0 no growth
0 to x2 growth
g2
gtx2 declining growth
g1
K growth 0 carrying capacity
0
K
x1
x2
fish population (x)
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FISHERIESOPTIMAL 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
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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 --gt Increase Costs
• --compliance makes per fish costs higher
• b. Regulations --gt 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)