The Nature of Natural
Resources
What are the scarce resources?
• Where do all raw materials come from?
• What is required in addition to raw
materials?
Laws of thermodynamics
• First law imposes constraint on total size
of economic system
– Can’t make something from nothing
– Only something available is the resources
provided by nature
Laws of thermodynamics
• Second law tells us that things fall apart.
– All production requires low entropy, and
creates high entropy waste
– Low entropy must be divided between
maintenance of natural capital and human
made (built) capital
– Finite stock of accumulated low entropy
– Solar energy is ultimate limit on physical size
of the economy
How much solar energy is
captured in the entire
United States (what is Net
Primary Production?)
Fourth law of
thermodynamics
• Matter is subject to entropy
– Controversial in theory
– Somewhat realistic in applications
• 100% recycling probably impossible
BUT…
• If all matter/energy moves towards greater
disorder, less usefulness, how do we
explain life?
• Doesn't information substitute for natural
resources?
Conclusion:
The ultimate scarce resource is
low entropy matter/energy
Low entropy resources provided by
nature
• Abiotic resources
–
–
–
–
–
Fossil fuels
Minerals
Water
Land
Solar power
• Biotic resources
– Ecosystem goods
– Ecosystem services
– Waste absorption
capacity
What are the characteristics
of scarce resources
relevant to allocation?
Stock-Flow Resources
(raw materials, ecosystem goods)
• E.g. ecosystem structure
• Production = material transformation
• Used up, not worn out: use = depletion
– My use leaves less for you to use
• Rate of flow can generally be controlled
– We choose how fast to consume fossil fuels
• Characterized by risk
Fund-Service Resources
(ecosystem functions, services,
land, machines, labor)
• Structure generates function= ecosystem services
• Not transformed into what it produces
– My use may not leave less for you to use
• Human made F-S R wears out, not used up
• Natural F-S R spontaneously restored by solar
power
• Rate of use cannot be controlled
• Natural F-S R characterized by uncertainty and
ignorance
Pizza example
• Is the cook a fund-service or stock-flow?
• Is the oven a fund-service or stock-flow?
• What happens if the price of labor
increases?
• Are the pizza ingredients a fund-service or
stock flow?
• What happens if the price of ingredients
increases?
So What?
• Raw material extraction depletes ecosystem
services
• Waste output depletes ecosystem services
• Services from nature include life support
functions
• We cannot treat ecosystem goods and
services independently– efficient allocation
must consider both
• They are not substitutes
Macroallocation
• How much ecosystem structure should be
allocated toward economic production, and
how much should be left intact to provide
ecosystem services?
Excludability
• Excludable resource regime
– One person can prevent another from using the
resource
– Necessary for markets to exist
• Non-excludable
– No enforceable property rights due to technology or
social institutions
– Can’t charge for use
• Some resources non-excludable by nature. None are
inherently excludable.
• Excludability is a product of institutions.
Rivalness
• Rival Goods
– My use leaves less for you to use
– All ecosystem goods are rival
• Non-rival (or non-depletable)
– My use does not leave less for you to use
– Marginal cost for additional user = 0
– Efficient allocation: Price = marginal cost of production
– All non-rival resources are services
• Non-rival but congestible
– Do such resources exist?
• Rival or non-rival is an innate characteristic of the
good, not a result of institutions
Rivalness (cont.)
• Non-rival but congestible
– Non-rival as long as few people use it, becomes
rival with excessive use
– Empty planet vs. full planet
So What?
Excludable
Non-Excludable
Market Good: cars,
houses, land, oil,
timber, waste
absorption capacity?
Open Access Regime:
Oceanic fisheries, timber
etc. from unprotected
forests, waste absorption
capacity
Non-rival
Tragedy of the noncommons:
patented information,
e.g. energy efficiency,
pollution control tech.
Pure Public Good:
Information, most ecosystem
services, e.g. climate
stability, coastline protection,
life support functions, etc.
Non-rival
congestible
Toll Good, club good:
Roads, parks, beaches,
etc.
Rival
Free Rider Problem