Market Failures and
Abiotic Resources
Review
 Fund-service vs. stock-flow resources
 Rival, non-rival but congestible, non-rival, anti-rival
 What’s the relationship between rivalness and fundservice, stock-flow distinction
 Excludable and non-excludable
Today’s Topics
 Fossil fuels and minerals
 Fresh Water
 Land
 Preferences for what to cover?
Are These Market Goods?
 Excludable
 Rival
 What about between generations?
 Resource Exhaustibility: A Myth Refuted by
Entrepreneurial Capital Maintenance
By John Brätland
 What about alternatives to fossil fuels?
 What is the rule for efficient production of market
goods?
How Important are Fossil Fuels?
 Are they essential to modern civilization?
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What are some of their critical uses?
Wealth of Nations and patent on steam engine
20,000 hours of work in a barrel of oil
Extremely 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 goods
 What are some of the externalities?
 How serious are they?
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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?
 At what temporal scales?
User Cost: The Value Arising
from Scarcity
 What would be a fair price for oil if it were infinite?
 What is the opportunity cost of extracting oil today?
 User cost: the opportunity cost of non-availability 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
 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 analysis
 Maximizes NPV, ignores future generations
 No one pays external costs (generally receive
subsidies instead)
 Empirical evidence contradicts it
Alternative Explanations
 Mayflower effect
 Information effect
 Scarcity effect
 What should we expect?
How Big is the Energy
Challenge?
 What is current energy usage?
 What will it be by 2050?
 What percent is fossil fuels?
 How much do we need to reduce carbon emissions to
stabilize the climate?
 What are the alternatives?
 What do we need to produce them?
 Are the alternatives market or non-markets?
 How much energy can we get from them?
 What do we do?
Fresh Water
Characteristics of Water
 Stock-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 Land
 What is Ricardian Land?
 What creates the value in Ricardian land?
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Farmland?
Urban land?
Location, location, location
Positive externalities
 How much of the value of Ricardian land is rent?
 What’s the supply curve for Ricardian land?
Relevance to Projects?
Speculative Bubbles
 The current mortgage crisis
 Asian flu
 Japan’s economic ‘collapse’
 Impact on business cycle
 How do we avoid these?