The authors seem compelled to open this chapter with a Not Guilty plea. Economics is not the root of over-exploitation and degradation of resources and environment. Economics even in prescriptive mode does not push for exploitation. Rather, government policy causes the problems we see by guiding resource use by politics, personal or corporate gain, or just plain shortsightedness.

We’ll discuss this in class. But let me offer my take here: In theory economics would not prescribe exploitive, inefficient use, but several normative elements of economics as it has been applied to resources and the environment, do lay the groundwork, as the authors reveal, I think on p. 90, in which resources are first and foremost defined as capital assets. Once you’ve taken that stance, then rational actors might very well liquidate those assets. Furthermore, the THEORY of externalities is all well and good, but we sure have had a hard time getting market forces to internalize those external costs. Indeed, there is strong pressure in the market to keep them external.

Basic tenets:

1. resources are capital assets witing to be developed
2. development cost money, owners must be rewarded
3. some costs of development remain external to the owner/user, are thus borne by others who do not particicopate in the benefits of resource development.

You can learn a lot about micro-economic theory of resources by following the argument for non-renewables like oil or coal.

Owners respond to asset value, value now relative to in the future. As well as cost of not selling resources.

Factors:

Asset cost (buying it originally)

Asset value

Cost of production

Market price

Price of alternative investments

The "simple model" (the "Hotelling" model) suggests that resources will be husband as long as the asset value is increasing, and that as it is depleted, the value will increase to a point at which consumers will no longer buy it and the resource is then physically or economically depleted.

The authors note that many things complicate the basic model, like exploration that yields more of the resource (thus suppressing price), and they take another poke at federal policy that subsidizes or mandates resource development regardless of market signals.

They define MSY (maximum sustained yield).

If value per unit is stable, the owner can still make more money by letting it grow or increasing its growth (e.g., adding fertilizer or otherwise manipulating productivity).

The owner can still liquidate (harvest faster than renewal) if they choose; especially when alternative investments are more profitable (which cannot be gained until the resource has been turned into a liquid asset, like cash).

They make a key point: the economically-optimal harvest is not MSY, but somewhat below MSY. But, here’s a rub: to get to this level, the owner must first harvest more than MSY to reduce the stock. This happened in history as resources like forests and fisheries were depleted, and Pinchot and others offered a scientific, sustaioned yield prescription.

The form of economic failure discussed here is failure of the market to value all of the costs or benefits of resources; society is most interested in failures to incorporate costs, as when a producer is able to dump wastes into the environment w/o costs. Someone else pays for the degradation. The authors would argue that if someone owned the stream or the air, then there would be no market failure since that owner would insists on compensation or cease and desists. But long-standing social norms and traditions make this difficult to create in reality, so failures like this are common.

Other market failures occur not because of poor property rights, but because many interactions among people are not market interactions, but power relaitons. A resource owner or producer may have the political power to assure that their costs of discharging waste do not rise, thus assuring an asymmetry of costs and benefits that favors the powerful producer.

Public control, and ownership of land and resource is often justified as a way to overcome such market failures. The authors point out the additional failures introduced by such arrangements: like below-cost timber sales which pure market forces would never allow, but which stem from bureaucratic incentives, power relaitons, and other inefficiencies.

The failures are: costs of sale not fully accounted for; asset value, especially in situ asset value, not counted; an non-market values are not counter. This last is often what causes great public tension over resources management.

Ways to expand the economic approach to solve some of these problems in the context of public resource management are discussed next, from Loomis, Chap. 13.

Loomis covers some similar ground as previous chapter (last class). But the main thrust is to get beyond the simple model of resource economics.

First, he offers more nuanced definitions of economic efficiency:

1. no one can be made better off w/o making someone worse off (Pareto Optimality)
2. the total benefits, to whomever they accrue, are maximized.

Hotelling’s Market efficiency is met at #2; while social policy may strive to achieve #1. Market failures violate either goal. Loomis argues that basic economic approaches support these notions of larger social benefit, as in prohibitions of monopolies.

Loomis moves on to complications that still dog economic principles:

Common pool resources in which the ownership assumed in previous theories is not there, and a user can harvest and pass on the costs to others who have no power (ownership) to enforce the internalization of those costs (or any claim on compensation).

Public Goods: or resources and values that inherently acrue to a broader population that cannot claim ownership nor have their consumption values accounted for in market systems. The example he gives is a wetland that provides many non-market benefits (birds for watching by neighbors, etc.---all things for which they do not pay---for which there are not even mechanisms for them to pay if they wanted to),---so the owner drains in order to produce an agricultural commodity that others will pay for.

"Classic" types of "public goods" are traditionally provided by government (paid for by taxes on private goods), like: national security; crime prevention; etc.

Other types are called "non-market or non-marketed values; intangible values; and even "option", "existence’ and "bequest" values.

Various tools have been developed to value (then, we assume, to internalize) the many non-market goods and services provided by the environment and by in situ natural resources (e.g., a standing forest rather than lumber at the mill).

One of the first was an effort to value recreation that was not marketed like, say, at Disney World.

Travel costs: Clawson and others used costs to travel to a site to recreate as one measure of the willingness to pay for that recreation resources. Although he doesn’t use this term, this was called Shadow Pricing. The price of gas, equipment, and time, was the minimum value of, say, a fishing trip to public water. (You can see this in the attitude whereby some people (like my wife) scoff at fisherman who spend lots of money to go fishing but never bring home any fish! (catch and release).

Other approaches were made to get at "willingness to pay" (WTP)

These became know as Contingent Valuation Methods (CVM)

Survey Methods: ask users their willingness to pay in carefully crafted surveys that specify the value to be provided, the costs, and the method of payment (e.g., a fee of some sort).

This got broadened to the notion the even "non-users" might derive some benefit from a conserved resource:

• Option value (they might want to go there someday and are willing to pay to have it available)
• Existence value (they simply value the continued existence of, say, a species).
• Bequest value: similar to existence, except inter-generational: the value we get today knowing the resource will be available to future generations.

The costs and benefits of sending peak flows down the Colorado thru the Grand Canyon

Losses due to the Exxon Valdez oil spill (note how this case raised a big debate over CVM, and a blue ribbon panel concluded that well-designed CVM studies were as good as market or jury assessments).

The logical extension of CVM is to the even more intangible resources like whole systems and system integrity.

Loomis suggests micro and macro scale approaches. Resources are valued for their benefits and for their role in the larger ecosystem, and thus a share of the resources and services that the ecosystem provides as a whole.

Such approaches could then assess the net values (positive and negative) of change sin ecosystem state, and in broad changes like global warming.

Challenge here, understated by Loomis, is whose values? Can any segment of the public reveal valid values in a survey? Maybe just focus on scientists who really know the ecosystem? But is that not a return to the "technocractic" approach championed by Pinchot and ill-suited to a democratic society?