Inefficiencies in Mineral Markets Monday, March 13, 2006

Dynamic Efficiency  Over time Quantities extracted decrease Prices increase  Rate of extraction depends upon: Demand Costs of extraction Discount rate Known quantity of resources

Over time, we have observed increases in quantities of minerals used AND decreases in most mineral prices. Does this mean that minerals are not being used efficiently?

Changes affecting extraction rates:  Unanticipated increases in demand  Changes in technology that have reduced extraction costs over time  Exploration and discovery of new reserves Until marginal cost of exploration and discovery is just equal to marginal rent (MUC)

But extraction rates may still be too fast and prices too low  External costs associated with mining, so MEC is lower than true social MEC Pollution Destruction of habitat

Quantity of coal mined $ D S=MPC only qmqm pmpm S=MPC + MSC q* P*

Responses to external costs  Regulations controlling how mining is done and requiring cleanup after mining is completed Federal Surface Mining Control and Reclamation Act Bonds required to guarantee reclamation

Other inefficiencies  Policy Depletion allowances Permits for mining on public land Quantity of coal mined $ D MPC MSC Pe Qe MPC with allowance Pm Qm

How does recycling affect extraction rates?  Costs of recycling Collection costs Separation costs Transport costs Processing costs External costs  Costs of using virgin materials Extraction, user, external

Aluminum Cans $ D MC recycled MC virgin P QvQv + r recycledvirgin

Aluminum Cans $ D MC virgin MC recycled P QrQr + v recycledvirgin

Aluminum Cans $ D MC virgin MC recycled P QrQr + v recycledvirgin