Market Failures and Thermodynamics Quick Review Excludability Excludable resource regime One person can prevent another from using the resource Necessary for markets to exist
Non-excludable No enforceable property rights due to technology or social institutions Cant charge for use Markets not possible Some resources non-excludable by nature. None are inherently excludable.
Excludability is a product of institutions. Rivalness Rival Goods My use leaves less for you to use All ecosystem goods are rival Non-rival (or non-depletable) My use does not leave less for you to use
Marginal cost for additional user = 0 What is optimal price under MC=MB rule? Rationing function of price leads to under-consumption All non-rival resources are services Rivalness Non-rival but congestible Rival at high levels of use Anti rival
My use makes you better off What's an example? Markets in non-rival resources lead to underconsumption. Inefficient. Rival or non-rival is an innate characteristic of the good, not a result of institutions So What?
Open Access Regime: Oceanic fisheries, timber etc. from unprotected forests, waste absorption capacity Non-rival, Anti-rival
Tragedy of the noncommons: patented information, e.g. energy efficiency, pollution control tech. Pure Public Good: Information, most ecosystem services, e.g. climate stability, coastline protection,
life support functions, etc. Non-rival congestible Toll Good, club good: Roads, parks, beaches, etc.
Rival Free Rider Problem Open Access
The Tragedy of the commons Common property vs. open access Perverse feedback mechanism Will be dealt with in detail when discussing natural resource economics Public Goods Free-riding
No price signal as feed-back mechanism Scarcity price increase innovation Lack of Incentives to produce them
Lack of incentives to create technologies that provide them Public Goods (cont.) Free-market enthusiasts dont deny public good problem, but claim they are relatively unimportant Increasing scale and public goods Are life support functions relatively
unimportant? Infrastructure as a public good Well return to this in discussion of natural monopolies Non-rival & Excludable: tragedy of the non-commons Why do we have patents?
When did patents come about? 1790s in US 1947 international, rarely used before 1980s Do patents promote ecologically sustainable scale? Create inadequate incentives for inventions that provide or preserve public goods
Raise costs for research that promotes the public good Example: new technology for highly efficient solar energy Do patents promote socially just distribution? Samuel Slater, Father of American
Industry Developed countries own 97% of all patents Raises costs for research that meets the needs of the poor Standing on the shoulders of giants
Do patents promote economically efficient allocation? Patents are monopolies Information is non-rival Too many patents may be slowing the progress of science, not increasing it
70 separate patents involved in Golden Rice. Wave of inventions preceded international patents Market goods: The theory of Externalities
Externalities Definition an activity by one agent causes a loss (gain) of welfare to another agent The loss (gain) of welfare is uncompensated Completely Internal to the Economic Process. Why?
How are these related to public goods? Examples Agriculture Ecosystem conversion loss of ecosystem services N,K runoff, dead zones etc. Siltation
Louisiana wetlands Factory farming Natural resource harvest Depletion of ecosystem services Oil production and Louisiana wetlands Waste emissions
Community Development Income inequality and status Crime reduction Economic stability Conversion of Mangrove Ecosystems to Shrimp Aquaculture Values of Natural Capital:
Mangrove Ecosystems Structure, raw materials Building materials, charcoal, food Function, services Habitat, nursery Storm protection Waste absorption Climate stabilization
Shrimp Aquaculture High short term profits, heavily promoted by economists Shrimp and fish for 3-5 years Carnivorous, net reduction in food production Less protein than intact ecosystem Massive waste output Irreversible(?) destruction of ecosystem
Impact of Conversion On natural capital: Loss of Ecosystem services On Fisheries (hence jobs, culture, etc.) Loss of fish production On culture? On social capital?
Optimal pollution/degradation What Can we Do? Regulations Best management practices Best available technologies Caps on production
Property rights Let market figure it out What Can we Do? Tax Set price, let this determine Q at which demand = price Tradable quota
Set Q, let this determine price Market Option I: Property Rights Cattle production Market Option I: Property Rights Shrimp aquaculture
Property Rights Who owns the environment? polluter rights sufferer rights What about future generations? Optimal externalities Transaction costs
in absence of transaction costs, no negative externalities What are transaction costs likely to be for externalities affecting public goods? Wealth effect Intergenerational externalities Market Option 2: Pigouvian tax:
Internal Nature of Externalities Economic growth must imply loss of ecological function Ecosystem services are ecological functions with value to humans Externalities from ecosystem structure lost Externalities from waste outputs If externalities are unavoidable, they are not
external Whats better, tax or quota? Prices adjust to ecological constraints faster then ecosystems adjust to economic impacts Distributional impacts Taxes Quotas
Ignorance and Uncertainty Perfect markets require perfect information Asymmetric information Nobel Prize in 2000 Theory of the Lemon Irreducible ignorance Time lags Ecosystem function
Asymmetric Preference Formation What forms our preferences? In what direction are our preferences pushed, towards market or non-market goods? Missing markets For a market to work, everyone must be
able to participate Future generations cant participate in todays markets People without money cannot participate, e.g. many indigenous peoples How much would the Mona Lisa sell for if it were auctioned off in St. Albans? Infinite transaction costs
Missing markets Irreversible changes Topsoil loss Non-renewable resource use and emissions Ecosystem loss and extinction Redesigning community infrastructure to depend on non-renewables
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