Chapter 7
Public Policy for Natural Resources
the collective actions that people undertake
through governmental institutions to manage
natural resource conservation and utilization in a
market economy
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1. The Objectives of Public Policy
• (1) Economic efficiency
– It takes into account both the benefits and the costs
of taking an action
– The natural assets of society are being utilized in a
way that maximizes their net benefits to the
members of that society
– Both market and nonmarket benefits are to be
counted
– It does not require that gross domestic product or
gross community product (the total monetary output
of people living within a given community) be
maximized
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• (2) Equity
– To be equitable means to be fair
– It has to do with how the overall benefits and costs
of natural resource use are distributed among
subgroups of the overall population
– Distributional disconnect: benefits are widely spread
among the population while costs are localized; or
benefits are localized and the costs are widely
dispersed
– How policies treat people who have different
amounts of wealth
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• (3) Flexibility
– Inflexible policy: the price for purchasing a mineral
claim is still $5 an acre, just as it was when the
mining was passed in 1872
– How well natural resource policies adapt to changing
circumstances (changes on the demand side in terms
of social factors and values that affect the WTP;
changes on the supply side that affect the availability
of resources)
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• (4) Enforceability
– Inflexible policy: the price for purchasing a mineral
claim is still $5 an acre, just as it was when the
mining was passed in 1872
– How well natural resource policies adapt to changing
circumstances (changes on the demand side in terms
of social factors and values that affect the WTP;
changes on the supply side that affect the availability
of resources)
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2. Types of Public Policies
• (I) Incentive-Based Policies
– (A) Market/property rights policies: establishing and
enforcing a new set of rules governing property
rights and market transactions, and letting the rate
of natural resource use be established by voluntary
interaction among suppliers and demanders
– (B) Government-sponsored incentive policies: public
agencies employ such devices as taxes and subsidies
to structure the incentives facing resource users
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• (II) Direct Public Action
– (C) Command and control policies: public authorities
establish direct controls in individual actions,
enforcing these controls with standard legal
enforcement practices
– (D) Direct public production: public agencies
themselves own natural resources and themselves
pursue programs of production and distribution
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In the case of open access that causes overfishing:
– (A) Market/property rights policies: the town would
divide the bay area into a number of parcels and
lease/sell them to fishers who would be free to make
their own harvest decisions; the leaseholds may be
bought and sold among fishers
– (B) Government-sponsored incentive policies: the town
could levy a tax per bushel of clams harvested; the tax
becomes a new operation cost for clam diggers; the
quantity of clams dug in the bay would decrease
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– (C) Command and control policies: the town would
establish a set of rules governing the harvesting of
shellfish (rules for the maximum allowable individual
harvest per day, for the minimum size of clam that
could be kept…)
– (D) Direct public production: the town or some other
public agency might hire people to do the fishing,
selling the clams, and distribute revenues itself
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(A) Private Property Rights
• In order to lead to socially efficient resource use,
property rights must be
– Complete: property rights must not be limited in any
way that would reduce the incentives of the owners
to search out the ways that maximize their value
(one-year leases weaken leaseholders’ incentive to
make long-run investment)
– Enforceable at reasonable cost: would-be trespassers
can be excluded at reasonable cost (the use of
fences); owners can be effectively enjoined from
using their property in illegal ways (clear cutting of
timber)
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– Transferable: the leaseholder can sell the farm land
to third parties; otherwise, it reduces the incentive
to maintain the maximum market value of natural
assets since they are not marketable
– Combined with a complete set of competitive
markets: a piece of forest land produces biodiversity
preservation services; markets for agricultural land
and suburban land are well developed, meaning that
there are well-recognized prices for forest land
devoted to these uses; forest land prices will reflect
ecological services
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(B) Government-Sponsored Incentive Policies
• Taxes
– Before tax: Table 7-2, page 109—aggregate-netreturn-maximizing number of fishers is 4, but the
open-access number of fishers is 8 because net
returns per fisher are positive up to this point
– With a charge of $7 per day per fisher: in an openaccess situation entry will increase up to the point
where marginal cost ($12+$7=$19) equals average
harvest value (catch per fisher). This occurs at a rate
of 4-5 fishers. The socially efficient number of fishers
is also 4
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Review Questions
1. Suppose that making shoes creates pollution, a
negative externality. To incorporate the externality
in a market graph we would
a. Add the externality cost to the market demand curve
b. Subtract the externality cost from the market demand
curve
c. Add the externality cost to both the market supply
curve and the market demand curve
d. Add the externality cost to the market supply curve
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2. If a business generating pollution is charged a
tax per unit of pollution,
a. The business will be forced to declare
bankruptcy
b. The business will raise its prices and produce
less of the polluting good
c. The business will be less likely to invest in
pollution-reducing technologies
d. The business will raise its prices but produce the
same quantity of the polluting good
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• Subsidies
– A payment to individuals in return for their reduced
use of the resource in question; the objective is to
affect the rate at which the resource is used
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(C) Command and Control Policies
• Example: only the first 4 fishers to apply would
be allowed and after that no further entry would
be permitted
• Figure 7-1, page 117: D and S determine market
quantity of qm; there are ecological costs
associated with producing timber, so, MSC is
above S, socially efficient output is q*. A
regulation is therefore stating that the maximum
allowable production is q*
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• Problems (Figure 7-1, page 117, continued):
– Information burden: The regulators must have good
knowledge about private production costs,
nonmarket ecological costs that the market is
currently leaving out, and the market demand curve
– Enforcement: at q*, since p2 (market price) is bigger
than p1 (marginal production costs), any producer
that can find a way to produce one more unit will
profit by p2 - p1 (incentive to be noncompliant)
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(D) Direct Public Production
• Examples: public parks at community, state, and
national levels, national forests, national
monuments……
• Often takes the form of allowing private firms to
have access to public domain resources under
controlled conditions
• The legal title to the situ resources remains for
the most part with the public, but the extraction
is actually done by private firms
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3. Market Failure/Government Failure
• Market failure: when externalities and public
goods are present, private markets are incapable
of operating efficiently and public policy is called
for
• Government failure: can happen in many ways
– Regulations are enacted but inadequately enforced
– Regulations create perverse incentives, making the
situations worse
– Regulations are redistributive; they are attempts by
one group to wrest resources away from another
group
– Public agencies cannot get required information 19
Review
Modeling a Pigouvian Tax (on a
negative production externality)
tax=MEC at QE
MSC = MPC + MEC
MPCt
MPC
a
Amount of tax
b
MPB = MSB
0
QE
QC
Q of gasoline
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Review
FYI
Modeling a Subsidy (on a positive
production externality)
subsidy = -MEC at QE
MPC
MPCs
a
MSC = MPC + MEC
b
MPB = MSB
0
QC
QE
Q of trees
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Review
FYI
Modelling a Pigouvian Subsidy
(on a Positive Consumption Externality)
($ millions)
MSC
K
PE = 175
Subsidy = $14 million
Subsidy=MEB at QE
PC = 170
MSB=MPB+MEB
L
PE – s = 161
MPBS
MPB
0
QC = 200
QE = 210
Q of scrubbers
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Modeling a Tax (on a negative
consumption externality)
Review
tax= -MEB at QE
MSC
a
Amount of tax
b
MPB
MPBt
MSB = MPB + MEB
0
QE
QC
Q
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