Natural Resource Economics Review

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

- 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