Market Failures and
Abiotic Resources
Review
 Stocks vs. flows
 Fund-service vs. stock-flow resources
 Rival and scarce, rival and abundant, non-rival, antirival (additive)
 What’s the relationship between rivalness and fundservice, stock-flow distinction
 Excludable and non-excludable
Lecture Topics
 Fossil fuels and minerals
 Fresh Water
 Land
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
More than 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?
Supply and
Demand for
Oil
Choice of Problem
 Look over syllabus for topics we will cover in this class
 Decide which topic most interests you
 Write one paragraph briefly describing the problem and
your interest in addressing it.
 You can change your mind if you choose, but must do
so in the very near future
Supply Curve Now
Supply Curve Over Time
Energy Per Capita in the US
Does Supply Respond to Price?
Oil production and oil prices from 2003 to 2010. Oil prices more than tripled
between January, 2005 and July, 2008, while total production increased by
less than 3%.
Does Price Respond to Supply?
i.e. do Prices Reflect Scarcity?
What’s the Demand Curve Look
Like?
 Demand for essential, non-substitutable resources
 What are the implications for marginal analysis?
 What are the implications for GNP?
Backstop Technology
 Perfect substitute for oil at high enough price
 Conventional economists emphasize substitutability
 What happens if poor
cannot afford it?
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?
Is this an accurate depiction of MEC?
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
 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)
 External costs may be unacceptably high
 Empirical evidence contradicts it
 Price poor indicator of scarcity
 Supply does not respond to price
Alternative Views
 Supply
 Information effect
 Scarcity effect
 What should we expect?
 Demand
 Property rights for future generations
 Rent (unearned profit) from extracting non-renewable
must be invested in renewables
 Non-renewables cannot be depleted faster than we
develop renewable substitutes
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-market?
 How much energy can we get from them?
 What do we do?
economic threshold (economic collapse)
Marginal costs fosssil
fuel use
(supply curve)
ecological threshold (catastrophic climate change)
marginal values
Supply and Demand for Fossil
Fuels
Marginal benefits of
fossil fuel use
(demand curve)
Fossil fuel use/anthropogenic CO2 emissions
News articles
 On the road in Texas, where oil is king again
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?
 Scarce or abundant?
 Global use has tripled over last 50 years, still rising
 1 billion without access to potable water
 Fossil aquifers
 China, Ogallala
 Rivers
In
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
 Externalities?
 Lack of data
 NAFTA and chapter 11
Ricardian Land
 What is Ricardian Land?
 What creates the value in land?
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Farmland?
Urban land?
Location, location, location
Positive externalities
 How much of the value of land is rent?
 What’s the supply curve for land?
VCAT and Rent Capture
 Source of public finance
 Transportation
 Parks and public amenities
 Reduced speculative bubbles
 Reduced urban sprawl
 Reduced infrastructure expenditures
 Reduced CO2 emissions
 Increased greenspace
Project Steps