January 19, 2006
Natural Resource Economics Review
Property Rights
- Bundle of entitlements that define what you can and can not do with a resource
- Characteristics
Universality –all resources are privately owned and entitlements are specified
Exclusivity – all benefits and costs accrue to only the owner
Transferability – all rights can be transferred in voluntary trades
Enforceability – rights are secure from involuntary seizures
- Marketplace transaction – two bundles of property rights are exchanged
- Value of bundles determines the value of the exchange
- Importance – owners of resources with well-defined property rights have a powerful incentive to use the resource efficiently
Economic Efficiency
- Allocation such that societies net benefit is maximized – be it static or dynamic
Achieved when property rights are well-defined
Market Failure
- Occurs when the market system does not achieve economic efficiency
- Does not imply a barrier to market clearing forces
- Causes
- Property rights are not well-defined – externalities, common property, public goods
- Social vs. private discount rate
- Government failure
- Market power – monopoly etc.
- Should we correct a market failure?
Externality Example - pollution
- Welfare of one economic agentdepends directlyon
his/her actions and actions of others
- Violates exclusivity
- Beneficial and harmful impacts
- Impact on price, quantity, and externality – social vs. private
Public Good Example - landscapes
- A good whose consumption is in indivisible – one person’s consumption does not impact another’s
-Nonrival in consumption - free rider problem – excludability violated
- Vertical Summation Public Good vs.Horizontal Summation Market Good
Common Property / Open Access Example - Fisheries
- Resources not exclusively controlled by a single economic agent – access cannot be controlled
- Violates exclusivity and enforceability
- Use it or lose it – first come first serve
Correcting for Market Failures
- Command and Control – Regulations
Example - Emission Standards – legal limit on the amount of pollutant a source can emit
Example - Best Available Control Technology – to get a permit to operate must install a specific technology
- Pigouvian Tax or Emissions Charge – pollutant (externality) example
- Basic idea tax the externality such that MC of private and social are the same
- Pigou’s Argument
Tax the externality to eliminate the divergence between social and private costs
Tax shifts the marginal private cost curve until it is the same as the marginal social cost
- Coase Theorem
- It does not matter who gets the rights, society will get to the efficient point as long as rights are assigned and transaction costs are low (both negotiation and enforcement)
- Assignment of Rights does impact the wealth position
Coase Theorem ExampleCattle Rancher / Wheat Farmer / Society
Number of Cattle / Marginal Benefits / Total Benefits / Marginal Cost / Total Cost / Net Benefit
1 / 10 / 10 / 1 / 2 / 8
2 / 9 / 19 / 2 / 3 / 16
3 / 8 / 27 / 3 / 6 / 21
4 / 6 / 33 / 4 / 10 / 23
5 / 5 / 38 / 5 / 15 / 23
6 / 4 / 42 / 6 / 21 / 21
7 / 3 / 45 / 7 / 28 / 17
8 / 2 / 47 / 8 / 36 / 11
- Individual Transferable Quotas or Permits – fisheries and pollution
- Idea - Pollution – to pollute need a permit
Agency will issue permits equal to the level of pollution desired
Can either control pollution or have a permit to pollute
- Permits need to be transferable – bought and sold
- Either control or buy permits which ever is cheaper
- As with emission charge flexible system and creates economic incentives
Control more than necessary sell permit to others
- Idea - Fisheries – very similar – permit to catch fish