Market Failures and Abiotic Resources

ReviewStocks vs. flows

Fund-service vs. stock-flow resources

Rival and scarce, rival and abundant, non-rival, anti-rival (additive)What’s the relationship between rivalness and

fund-service, stock-flow distinction

Excludable and non-excludable

Lecture TopicsFossil fuels and minerals

Fresh Water

Land

AND MINERALS

Are These Market Goods?Excludable

RivalWhat about between generations?Resource Exhaustibility: A Myth Refuted by

Entrepreneurial Capital MaintenanceBy John Brätland

What about alternatives to fossil fuels?What is the rule for efficient production of market

goods?

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 engineMore than 20,000 hours of work in a barrel of oilExtremely high energy return on energy invested

Are there any suitable substitutes to conventional oil?

Have we developed more substitutes or more complements since 1869?

Supply and Demand for

Oil

Choice of ProblemLook over syllabus for topics we will cover in this

class

Decide which topic most interests you

Write one paragraph briefly describing the problem and your interest in addressing it.

You can change your mind if you choose, but must do so in the very near future

Supply Curve Now

Supply Curve Over Time

Energy Per Capita in the US

Oil production and oil prices from 2003 to 2010. Oil prices more than tripled between January, 2005 and July, 2008, while total production increased by less than 3%.

Does Supply Respond to Price?

Does Price Respond to Supply? i.e. do Prices Reflect Scarcity?

What’s the Demand Curve Look Like?

Demand for essential, non-substitutable resources

What are the implications for marginal analysis?

What are the implications for GNP?

Backstop Technology Perfect substitute for oil at high enough price

Conventional economists emphasize substitutability

What happens if poorcannot afford it?

Negative Externalities = degradation of public

goodsWhat 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?

Is this an accurate depiction of MEC?

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

User Cost: The Value Arising from Scarcity

What’s the opportunity cost of not extracting oil?

The Hotelling rule: balancing opportunity costs

What impact should user cost have on rates of extraction?

What impact does it have?

Why?

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 don’t we do this? What are the obstacles?

Flaws in the NCE analysisMaximizes NPV, ignores future generations

No one pays external costs (generally receive subsidies instead)

External costs may be unacceptably high

Empirical evidence contradicts itPrice poor indicator of scarcitySupply does not respond to price

Alternative ViewsSupply

Information effectScarcity effectWhat should we expect?

DemandProperty rights for future generationsRent (unearned profit) from extracting non-

renewable must be invested in renewablesNon-renewables cannot be depleted faster than we

develop renewable substitutes

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-market? How much energy can we get from them?

What do we do?

Fossil fuel use/anthropogenic CO2 emissions

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Supply and Demand for Fossil Fuels

News articlesOn the road in Texas, where oil is king

again

Fresh Water

Characteristics of WaterStock-flow or Fund-service?

We treat it here as a stock-flow. Examples?

Renewable or exhaustible? Aquifers? Surface water?

Scarce or abundant? Global use has tripled over last 50 years, still rising 1 billion without access to potable water Fossil aquifers

China, Ogallala Rivers

What’s the demand curve look like?

How does this compare with a conventional demand curve?

In

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?

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 managementExternalities?Lack of dataNAFTA and chapter 11

Ricardian LandWhat is Ricardian Land?

What creates the value in land?Farmland?Urban land?Location, location, locationPositive externalities

How much of the value of land is rent?

What’s the supply curve for land?

VCAT and Rent CaptureSource of public finance

TransportationParks and public amenities

Reduced speculative bubbles

Reduced urban sprawlReduced infrastructure expendituresReduced CO2 emissions Increased greenspace

Project Steps