3' HOW CAN ECONOMICS AID IN NATURAL RESOURCE MANAGEMENT - PowerPoint PPT Presentation


Title: 3' HOW CAN ECONOMICS AID IN NATURAL RESOURCE MANAGEMENT


1
3. HOW CAN ECONOMICS AID IN NATURAL RESOURCE
MANAGEMENT?
  • SPRING 2002
  • Larry D. Sanders

Dept. of Ag Economics Oklahoma State
University
2
INTRODUCTION
  • Purpose to understand economic tools/concepts
    that can be applied to natural resource
    management
  • Learning Objectives
  • 1. To understand the concept of externalities
    how it shows that markets fail to protect
    environmental quality.
  • 2. Provide a summary overview of the economics
    of natural resource systems.

3
Market Failure
  • Inefficient allocation of resources
  • MBp MCp MBs MCs
  • Marginal External Cost MEC MCs-MCp
  • Marginal External Benefit MEB MBs-MBp
  • Sources
  • Imperfect Competition (market power)
  • Imperfect Information
  • Public Goods--property rights not assigned
  • Externalities--costs/benefits that dont accrue
    to economic unit that creates them

4
Externalities
  • Positive Externality benefit gained by those
    outside the decisionmaking economic unit no
    compensation returned (called external benefits)
  • MBp lt MBs
  • Government intervention (subsidy of buyers or
    sellers) may approximate increase in MBp leading
    to MBp MBs
  • Example private forest vs. public forest

5
Market Failure--Benefits
SMCpMCs
Price
P2
DMBs
P1
DMBp
Quantity
Q1
Q2
6
Externalities (cont)
  • Negative Externality cost to others (losers)
    outside the decisionmaking economic unit that is
    uncompensated (called external costs)
  • equivalent to a producer subsidy
  • MCp lt MCs
  • Government intervention (tax) may increase MCp,
    leading to MCp MCs
  • Examples
  • production practices that cause soil erosion
  • pollution from steel mill or hog facility

7
Market Failure--Costs
SMCs
SMCp
Price
P2
DMBpMVpMWTPpMBs
P1
Quantity
Q2
Q1
8
Market Efficiency Issues
  • Equity
  • Efficiency may not be Equitable
  • Distribution may be a problem
  • Best is determined by Society
  • Dynamic Efficiency
  • Static 1 time period or multiple time periods
    independent of each other
  • Dynamic Multiple time periods, dependent on
    each other Pt1 f (x,y, Pt, z)

9
Market Failure Property Rights
  • A reason for MCs MBs Property Rights
  • Property Rights--Defined by Society
  • Clean Air/Water?
  • Private Property?
  • Open-Access Externality
  • Property Rights insufficient or unenforceable to
    prevent general use, leading to
    destruction/diminishment/damage of resource

10
Institutional Factors of Property Rights
  • Institutional Arrangements
  • Property (assumes rights to possession use of
    economic objects w/govt. rules for ownership,
    transfer, use, etc.)
  • Private vs. Common Property (Common-Pool)
  • Limited rights (land, water, minerals, air space,
    time share, etc.)
  • Development (zoning, building, flood control,
    homestead, permit markets, taxes, court
    injunctions, eminent domain, etc.)

11
Institutional Factors (continued)
  • Property rights for Land--Fee Simple Ownership
  • Rights of Owner to Possess/use, Sell/Lease,
    Devise (pass to heirs), Mortgage, Subdivide,
    Grant Easements, Sue for damages
  • Rights of Govt. to Tax, Take for public use
    (eminent domain), Control use of (police power),
    Escheat (reversion to state at death)
  • Rights are exclusive, not absolute
  • Rights evolve in court cases law
  • Rights carry legal ethical responsibilities

12
Property Rights the Takings Issue
  • Regulatory takings when government rules/regs
    restrict the normal use/rights of private
    property owners
  • Private sector takings when private property
    owners alter an ecosystem to the extent it
    threatens/endangers the existence of plant or
    animal species

13
Open Access (ownership not assigned)
  • Common law of capture
  • No duties
  • Examples Ocean resources beyond national
    boundaries Atmosphere
  • Common law may provide for punishment for
    pollution if national/international regulations
    in place

14
Common Pool Resources (CPRs)
  • Difficult to exclude multiple persons from use
  • Resource taken by one user not available to
    others (rivalry in consumption)
  • In absence of rules, users will over-use CPR
  • Efficient level of appropriation
  • MC MRP

15
CPR (cont)
  • Natural resources or areas held in common by a
    group (typically the public) of the community,
    state, region or nation, rather than by a private
    entity collective property, open access
    (occasionally rules of use)
  • Examples
  • national parks, forests, wilderness, wild/scenic
    rivers
  • communal pastures/parks, waterways/sources

16
CPR/Common Property Background Issues
  • Resources to which all members of a given
    society/group have co-equal rights of use
  • may require licenses or permits
  • may impose quotas
  • government acts as a trustee
  • Historically, concept grew from common fishing,
    hunting, grazing lands
  • customs, traditions, taboos, fission must evolve
    to prevent depletion of resources (Native
    Americans African tribes)
  • commercial movement eroded commons in Europe

17
Common Property (continued)
  • Fisheries, wild game, grazing, forest, public
    recreational land, salt marshes, beaches, ocean
    bottoms, navigable inland waterways remain
    largely common property
  • Key problem overuse/externalities require
    government intervention
  • Key policy issues
  • 1. Which policy tools most appropriate?
  • 2. What is the optimal level of common property
    resource?

18
Government Intervention Alternatives to Resolve
Market Failure
  • 1. Moral Suasion (jawboning)--govt. statements
    that correcting market failure is moral (woodsy
    owl, smokey the bear)
  • 2. Govt. Production of Environmental Quality
    --plant trees, stock fish, treat sewage
  • 3. Command/Control Regulations--constraints
    w/penalties/fines (pesticide use labels,
    catalytic converters, feedlot lagoon regs)
  • 4. Economic Incentives--make self-interest
    coincide w/social interest (pollution
    tax/subsidy, marketable permits)

19
Pigou vs. Coase
  • Pigouvian Tax/Subsidy
  • corrects externalities that create MBs MCs by
    internalizing costs (tax emission)/benefits
  • Tax MCs-MCp
  • Subsidy MBs-MBp
  • Coase Theorem
  • externality unnecessary undesirable
  • let market determine optimal level of externality
  • assumes transaction costs are small property
    rights allocation not important

20
Pigouvian Tax of Negative Externalitytax output
MCs

MCp
P2
Tax MEC
P1
MBpMBs
Q1
OUTPUTQ
Q2
21
Pigouvian Subsidy of Positive Externality--subsidy
to consumer

MCp
Subsidy MEB
P2
P1
MBs
MBp
Q2
OUTPUTQ
Q1
22
Pigouvian Subsidy of Positive Externality--subsidy
to producer

MCp
Subsidy MEB
MC subsidy
P1
MBs
P2
MBp
Q2
OUTPUTQ
Q1
23
Economic Incentives to Improve Natural
Resource/Environmental Quality
  • Marketable Pollution Permits
  • Trade permits in market to equate MC across
    polluters
  • Initial distribution
  • history, auction, lottery
  • equity geographic concerns
  • Bonding Systems
  • Liability Systems
  • Pollution Subsidies

24
FISHERIES BACKGROUND
  • MARKET FAILURE
  • Overfishing
  • Pollution
  • Local/regional impacts
  • Commercial Populations down
  • Global Trends of Concern
  • Recreation Fishing Important

25
FISHERIES BIOLOGY
  • Appropriate Habitat w/food oxygen
  • Reproduction f(population size, habitat)
  • Logistic Growth Function

growth of population (g)
0 no growth
0 to x2 growth
g2
gtx2 declining growth
g1
K growth 0 carrying capacity
0
K
x1
x2
fish population (x)
26
FISHERIESOPTIMAL HARVEST
  • Max Sustainable Yield
  • C1 fish pop. declines natural growth harvest
    at x1 x1
  • Cmsy 1 equilibrium point management goal

growth (g), catch (c)
Cmsy
C1
C2
K
x1
x2
x1
x2
population (x)
x2
27
FISHERIES Open-Access (do not explicitly address
entry problem)
  • 1. Modify fishing behavior w/o directly
    affecting participation (increase cost) may
    restrict
  • --Catch methods
  • --Which fish
  • --Harvest time
  • --Location
  • --Number

28
FISHERIES OPEN-ACCESS (cont)
  • 2. Economic Analysis
  • a. Regulations --gt Increase Costs
  • --compliance makes per fish costs higher
  • b. Regulations --gt Decrease Costs
  • --success of restrictions may increase
    population, may lead to higher catch per attempt
  • --this reduces average cost, worsening
    open-access inefficiencies
  • c. Aquaculture as a solution to open-access
  • --Limited by cultivable species

29
FISHERIES LIMITED-ENTRY
  • 1. Raise fisher costs, not social costs
  • --Similar to pollution control
  • 2. Per unit tax
  • 3. Marketable catch quota
  • 4. Limit number of boats or fishers
  • --Auction or history
  • --Virginia oyster fishery--private property
  • --UN economic exclusion zone--200-mi. limit
  • 5. Resistance Informal (close-knit communities)
    Utility maximizers vs. Profit maximizers

30
FISHERIES RELATED ISSUES
  • INCIDENTAL CATCH
  • Gill nets, long-lining
  • Economic incentives vs. regulation
  • HABITAT POLLUTION
  • Most freshwater many saltwater species
  • 3d World soil erosion human waste
  • RECREATIONAL FISHERY MANAGEMENT
  • Open-access problems
  • Stocking, closed seasons, improvements,
    catch/release, size limits (CVM, TCM, UD)
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3' HOW CAN ECONOMICS AID IN NATURAL RESOURCE MANAGEMENT

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Title: 3' HOW CAN ECONOMICS AID IN NATURAL RESOURCE MANAGEMENT


1
3. HOW CAN ECONOMICS AID IN NATURAL RESOURCE
MANAGEMENT?
  • SPRING 2002
  • Larry D. Sanders

Dept. of Ag Economics Oklahoma State
University
2
INTRODUCTION
  • Purpose to understand economic tools/concepts
    that can be applied to natural resource
    management
  • Learning Objectives
  • 1. To understand the concept of externalities
    how it shows that markets fail to protect
    environmental quality.
  • 2. Provide a summary overview of the economics
    of natural resource systems.

3
Market Failure
  • Inefficient allocation of resources
  • MBp MCp MBs MCs
  • Marginal External Cost MEC MCs-MCp
  • Marginal External Benefit MEB MBs-MBp
  • Sources
  • Imperfect Competition (market power)
  • Imperfect Information
  • Public Goods--property rights not assigned
  • Externalities--costs/benefits that dont accrue
    to economic unit that creates them

4
Externalities
  • Positive Externality benefit gained by those
    outside the decisionmaking economic unit no
    compensation returned (called external benefits)
  • MBp lt MBs
  • Government intervention (subsidy of buyers or
    sellers) may approximate increase in MBp leading
    to MBp MBs
  • Example private forest vs. public forest

5
Market Failure--Benefits
SMCpMCs
Price
P2
DMBs
P1
DMBp
Quantity
Q1
Q2
6
Externalities (cont)
  • Negative Externality cost to others (losers)
    outside the decisionmaking economic unit that is
    uncompensated (called external costs)
  • equivalent to a producer subsidy
  • MCp lt MCs
  • Government intervention (tax) may increase MCp,
    leading to MCp MCs
  • Examples
  • production practices that cause soil erosion
  • pollution from steel mill or hog facility

7
Market Failure--Costs
SMCs
SMCp
Price
P2
DMBpMVpMWTPpMBs
P1
Quantity
Q2
Q1
8
Market Efficiency Issues
  • Equity
  • Efficiency may not be Equitable
  • Distribution may be a problem
  • Best is determined by Society
  • Dynamic Efficiency
  • Static 1 time period or multiple time periods
    independent of each other
  • Dynamic Multiple time periods, dependent on
    each other Pt1 f (x,y, Pt, z)

9
Market Failure Property Rights
  • A reason for MCs MBs Property Rights
  • Property Rights--Defined by Society
  • Clean Air/Water?
  • Private Property?
  • Open-Access Externality
  • Property Rights insufficient or unenforceable to
    prevent general use, leading to
    destruction/diminishment/damage of resource

10
Institutional Factors of Property Rights
  • Institutional Arrangements
  • Property (assumes rights to possession use of
    economic objects w/govt. rules for ownership,
    transfer, use, etc.)
  • Private vs. Common Property (Common-Pool)
  • Limited rights (land, water, minerals, air space,
    time share, etc.)
  • Development (zoning, building, flood control,
    homestead, permit markets, taxes, court
    injunctions, eminent domain, etc.)

11
Institutional Factors (continued)
  • Property rights for Land--Fee Simple Ownership
  • Rights of Owner to Possess/use, Sell/Lease,
    Devise (pass to heirs), Mortgage, Subdivide,
    Grant Easements, Sue for damages
  • Rights of Govt. to Tax, Take for public use
    (eminent domain), Control use of (police power),
    Escheat (reversion to state at death)
  • Rights are exclusive, not absolute
  • Rights evolve in court cases law
  • Rights carry legal ethical responsibilities

12
Property Rights the Takings Issue
  • Regulatory takings when government rules/regs
    restrict the normal use/rights of private
    property owners
  • Private sector takings when private property
    owners alter an ecosystem to the extent it
    threatens/endangers the existence of plant or
    animal species

13
Open Access (ownership not assigned)
  • Common law of capture
  • No duties
  • Examples Ocean resources beyond national
    boundaries Atmosphere
  • Common law may provide for punishment for
    pollution if national/international regulations
    in place

14
Common Pool Resources (CPRs)
  • Difficult to exclude multiple persons from use
  • Resource taken by one user not available to
    others (rivalry in consumption)
  • In absence of rules, users will over-use CPR
  • Efficient level of appropriation
  • MC MRP

15
CPR (cont)
  • Natural resources or areas held in common by a
    group (typically the public) of the community,
    state, region or nation, rather than by a private
    entity collective property, open access
    (occasionally rules of use)
  • Examples
  • national parks, forests, wilderness, wild/scenic
    rivers
  • communal pastures/parks, waterways/sources

16
CPR/Common Property Background Issues
  • Resources to which all members of a given
    society/group have co-equal rights of use
  • may require licenses or permits
  • may impose quotas
  • government acts as a trustee
  • Historically, concept grew from common fishing,
    hunting, grazing lands
  • customs, traditions, taboos, fission must evolve
    to prevent depletion of resources (Native
    Americans African tribes)
  • commercial movement eroded commons in Europe

17
Common Property (continued)
  • Fisheries, wild game, grazing, forest, public
    recreational land, salt marshes, beaches, ocean
    bottoms, navigable inland waterways remain
    largely common property
  • Key problem overuse/externalities require
    government intervention
  • Key policy issues
  • 1. Which policy tools most appropriate?
  • 2. What is the optimal level of common property
    resource?

18
Government Intervention Alternatives to Resolve
Market Failure
  • 1. Moral Suasion (jawboning)--govt. statements
    that correcting market failure is moral (woodsy
    owl, smokey the bear)
  • 2. Govt. Production of Environmental Quality
    --plant trees, stock fish, treat sewage
  • 3. Command/Control Regulations--constraints
    w/penalties/fines (pesticide use labels,
    catalytic converters, feedlot lagoon regs)
  • 4. Economic Incentives--make self-interest
    coincide w/social interest (pollution
    tax/subsidy, marketable permits)

19
Pigou vs. Coase
  • Pigouvian Tax/Subsidy
  • corrects externalities that create MBs MCs by
    internalizing costs (tax emission)/benefits
  • Tax MCs-MCp
  • Subsidy MBs-MBp
  • Coase Theorem
  • externality unnecessary undesirable
  • let market determine optimal level of externality
  • assumes transaction costs are small property
    rights allocation not important

20
Pigouvian Tax of Negative Externalitytax output
MCs

MCp
P2
Tax MEC
P1
MBpMBs
Q1
OUTPUTQ
Q2
21
Pigouvian Subsidy of Positive Externality--subsidy
to consumer

MCp
Subsidy MEB
P2
P1
MBs
MBp
Q2
OUTPUTQ
Q1
22
Pigouvian Subsidy of Positive Externality--subsidy
to producer

MCp
Subsidy MEB
MC subsidy
P1
MBs
P2
MBp
Q2
OUTPUTQ
Q1
23
Economic Incentives to Improve Natural
Resource/Environmental Quality
  • Marketable Pollution Permits
  • Trade permits in market to equate MC across
    polluters
  • Initial distribution
  • history, auction, lottery
  • equity geographic concerns
  • Bonding Systems
  • Liability Systems
  • Pollution Subsidies

24
FISHERIES BACKGROUND
  • MARKET FAILURE
  • Overfishing
  • Pollution
  • Local/regional impacts
  • Commercial Populations down
  • Global Trends of Concern
  • Recreation Fishing Important

25
FISHERIES BIOLOGY
  • Appropriate Habitat w/food oxygen
  • Reproduction f(population size, habitat)
  • Logistic Growth Function

growth of population (g)
0 no growth
0 to x2 growth
g2
gtx2 declining growth
g1
K growth 0 carrying capacity
0
K
x1
x2
fish population (x)
26
FISHERIESOPTIMAL HARVEST
  • Max Sustainable Yield
  • C1 fish pop. declines natural growth harvest
    at x1 x1
  • Cmsy 1 equilibrium point management goal

growth (g), catch (c)
Cmsy
C1
C2
K
x1
x2
x1
x2
population (x)
x2
27
FISHERIES Open-Access (do not explicitly address
entry problem)
  • 1. Modify fishing behavior w/o directly
    affecting participation (increase cost) may
    restrict
  • --Catch methods
  • --Which fish
  • --Harvest time
  • --Location
  • --Number

28
FISHERIES OPEN-ACCESS (cont)
  • 2. Economic Analysis
  • a. Regulations --gt Increase Costs
  • --compliance makes per fish costs higher
  • b. Regulations --gt Decrease Costs
  • --success of restrictions may increase
    population, may lead to higher catch per attempt
  • --this reduces average cost, worsening
    open-access inefficiencies
  • c. Aquaculture as a solution to open-access
  • --Limited by cultivable species

29
FISHERIES LIMITED-ENTRY
  • 1. Raise fisher costs, not social costs
  • --Similar to pollution control
  • 2. Per unit tax
  • 3. Marketable catch quota
  • 4. Limit number of boats or fishers
  • --Auction or history
  • --Virginia oyster fishery--private property
  • --UN economic exclusion zone--200-mi. limit
  • 5. Resistance Informal (close-knit communities)
    Utility maximizers vs. Profit maximizers

30
FISHERIES RELATED ISSUES
  • INCIDENTAL CATCH
  • Gill nets, long-lining
  • Economic incentives vs. regulation
  • HABITAT POLLUTION
  • Most freshwater many saltwater species
  • 3d World soil erosion human waste
  • RECREATIONAL FISHERY MANAGEMENT
  • Open-access problems
  • Stocking, closed seasons, improvements,
    catch/release, size limits (CVM, TCM, UD)
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