Market Failures and Abiotic Resources

ReviewFund-service vs. stock-flow resources

Rival, non-rival but congestible, non-rival, anti-rivalWhat’s the relationship between rivalness and

fund-service, stock-flow distinction

Excludable and non-excludable

AND MINERALS

Are These Market Goods?Excludable

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

Entrepreneurial Capital MaintenanceBy John Brätland

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 engine20,000 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?

What do we know about their demand curve?

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?

User Cost: The Value Arising from Scarcity

What is the opportunity cost of extracting oil today?

User cost: the opportunity cost of nonavailability 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

Backstop technology, discounting and time to

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)

Empirical evidence contradicts it

Alternative ExplanationsMayflower effect

Information effect

Scarcity effect

What should we expect?

Fresh Water

Characteristics of WaterStock-flow or Fund-service?

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

Renewable or exhaustible?Aquifers?Surface water?

What’s the demand curve look like?

How does this compare with a conventional demand curve?

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 management

Ricardian LandWhat is Ricardian Land?

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

How much of the value of Ricardian land is rent?

What’s the supply curve for Ricardian land?

Relevance to Projects?

Speculative BubblesThe current mortgage crisis

Asian flu

Japan’s economic ‘collapse’

Impact on business cycle

How do we avoid these?