Market Failures and Thermodynamics Quick Review Excludability Excludable
Market Failures and Thermodynamics
Quick Review
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 – Markets not possible • 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 – What is optimal price under MC=MB rule? – Rationing function of price leads to under-consumption – All non-rival resources are services
Rivalness • Non-rival but congestible – Rival at high levels of use • Anti rival – My use makes you better off – What's an example? • Markets in non-rival resources lead to underconsumption. Inefficient. • Rival or non-rival is an innate characteristic of the good, not a result of institutions
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, Anti-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
Open Access • • The “Tragedy of the commons” Common property vs. open access Perverse feedback mechanism Will be dealt with in detail when discussing natural resource economics
Public Goods • Free-riding • No price signal as feed-back mechanism – Scarcity price increase innovation • Lack of Incentives to produce them • Lack of incentives to create technologies that provide them
Public Goods (cont. ) • Free-market enthusiasts don’t deny public good problem, but claim they are relatively unimportant • Increasing scale and public goods • Are life support functions relatively unimportant? • Infrastructure as a public good • We’ll return to this in discussion of natural monopolies
Non-rival & Excludable: tragedy of the non-commons • Why do we have patents? • When did patents come about? – 1790 s in US – 1947 international, rarely used before 1980 s
Do patents promote ecologically sustainable scale? • Create inadequate incentives for inventions that provide or preserve public goods • Raise costs for research that promotes the public good • Example: new technology for highly efficient solar energy
Do patents promote socially just distribution? • Samuel Slater, “Father of American Industry” • Developed countries own 97% of all patents • Raises costs for research that meets the needs of the poor • “Standing on the shoulders of giants”
Do patents promote economically efficient allocation? • Patents are monopolies • Information is non-rival • Too many patents may be slowing the progress of science, not increasing it – 70 separate patents involved in Golden Rice. • Wave of inventions preceded international patents
Market goods: The theory of Externalities
Externalities • Definition – “an activity by one agent causes a loss (gain) of welfare to another agent” – “The loss (gain) of welfare is uncompensated” • Completely Internal to the Economic Process. Why? • How are these related to public goods?
Examples • Agriculture – Ecosystem conversion loss of ecosystem services – N, K runoff, dead zones etc. – Siltation – Louisiana wetlands – Factory farming • Natural resource harvest – Depletion of ecosystem services – Oil production and Louisiana wetlands – Waste emissions • Community Development – Income inequality and status – Crime reduction – Economic stability
Conversion of Mangrove Ecosystems to Shrimp Aquaculture
Values of Natural Capital: Mangrove Ecosystems • Structure, raw materials • Building materials, charcoal, food • Function, services • Habitat, nursery • Storm protection • Waste absorption • Climate stabilization
Shrimp Aquaculture • High short term profits, heavily promoted by economists • Shrimp and fish for 3 -5 years • Carnivorous, net reduction in food production • Less protein than intact ecosystem • Massive waste output • Irreversible(? ) destruction of ecosystem
Impact of Conversion • On natural capital: • Loss of Ecosystem services • On Fisheries (hence jobs, culture, etc. ) • Loss of fish production • On culture? • On social capital?
‘Optimal’ pollution/degradation
What Can we Do? • Regulations – Best management practices – Best available technologies – Caps on production • Property rights – Let market figure it out
What Can we Do? • Tax – Set price, let this determine Q at which demand = price • Tradable quota – Set Q, let this determine price
Market Option I: Property Rights Cattle production
Market Option I: Property Rights Shrimp aquaculture
Property Rights • • Who owns the environment? polluter ‘rights’ sufferer rights What about future generations?
Optimal externalities • Transaction costs – in absence of transaction costs, no negative externalities – What are transaction costs likely to be for externalities affecting public goods? • Wealth effect • Intergenerational externalities
‘Market’ Option 2: Pigouvian tax: Getting prices right tax
'Market' Option 3: Tradable Quotas: setting ecologically sustainable scale quota
Internal Nature of ‘Externalities’ • Economic growth must imply loss of ecological function – Ecosystem services are ecological functions with value to humans • Externalities from ecosystem structure lost • Externalities from waste outputs • If ‘externalities’ are unavoidable, they are not external
What’s better, tax or quota? • Prices adjust to ecological constraints faster then ecosystems adjust to economic impacts • Distributional impacts – Taxes – Quotas
Ignorance and Uncertainty • Perfect markets require perfect information • Asymmetric information – Nobel Prize in 2000 – Theory of the Lemon • Irreducible ignorance • Time lags • Ecosystem function
Asymmetric Preference Formation • What forms our preferences? • In what direction are our preferences pushed, towards market or non-market goods?
Missing markets • For a market to work, everyone must be able to participate • Future generations can’t participate in today’s markets • People without money cannot participate, e. g. many indigenous peoples • How much would the Mona Lisa sell for if it were auctioned off in St. Albans? • Infinite transaction costs
Missing markets • Irreversible changes – Topsoil loss – Non-renewable resource use and emissions – Ecosystem loss and extinction – Redesigning community infrastructure to depend on non-renewables
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