- Study Guide (Course-wide Content)
A. The Economics of Natural Resources
- Natural resources are nonrenewable when they cannot regenerate quickly and are therefore essentially fixed in supply. Resources are renewable when their services are replenished regularly and they can, if properly managed, yield useful services indefinitely.
- Natural resources are appropriable when firms or consumers can capture the full benefits of their services; examples include vineyards and oil fields. Natural resources are inappropriable when their total costs or benefits do not accrue to the owners; in other words, they involve externalities.
- The return to fixed factors like land is called pure economic rent, or rent, for short. Since the supply curve for land is vertical and completely inelastic, the rent will be price-determined rather than price-determining.
- A factor like land that is inelastically supplied will continue to work the same amount even though its factor reward is reduced. For this reason, Henry George pointed out that rent is in the nature of a surplus rather than a reward necessary to coax out the factor's effort. This provides the basis for his single-tax proposal to tax the unearned increment of land value, which raises tax revenues without raising prices to consumers or distorting production. Modern tax theory extends George's insight by showing that inefficiencies are minimized by taxing goods that are relatively inelastic in supply or demand because such taxes lead to relatively small distortions in behavior.
- Environmental problems arise because of externalities that stem from production or consumption. An externality is an activity that imposes involuntary costs or benefits on others and whose effects are not completely reflected in market prices.
- The polar extreme of an externality is the case of public goods, like national defense, where all consumers in a group share equally in the consumption of the good and cannot be excluded. Public health, inventions, parks, and dams also possess public-good properties. These contrast with private goods, like bread, which can be divided and provided to a single individual.
- An unregulated market economy will produce too much pollution and too little abatement. Unregulated firms decide on abatement and other public goods by comparing the marginal private benefits of abatement with the marginal costs. But efficiency requires that the marginal social benefits of abatement equal the marginal costs.
- Economists emphasize that the efficient management of externalities requires the proper pricing of natural and environmental resources. This involves ensuring that market participants face the full social costs of their activities.
- There are different approaches through which governments can take steps to internalize or correct the inefficiencies arising from externalities. Alternatives include decentralized or private solutions (such as negotiations or legal liability rules) and government-imposed approaches (such as pollution-emission standards or emissions taxes). Experience indicates that no single approach will fit every circumstance, but many economists believe that greater use of market-oriented approaches would improve the efficiency of regulatory systems.
- Global public goods present the thorniest problems because they cannot easily be solved by either markets or national governments. Nations must work together to devise new tools to forge international agreements when issues such as global warming threaten our ecosystem and our standards of living.