The Nature of Natural Resources

__________ is a legal principle that when enforced allows an owner to prevent others from using his or her asset. __________ is an inherent characteristic of certain resources whereby consumption or use by one person reduces the amount available for everyone else. __________ is a legal principle that when enforced allows an owner to prevent others from using his or her asset. __________ is an inherent characteristic of certain resources whereby consumption or use by one person reduces the amount available for everyone else. A. Supply, Demand B. Rivalness, Excludability C. Privacy, Excludability D. Rivalness, Privacy E. Excludability, Rivalness

What are the scarce 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 disorder/uselessness increases – All production requires low entropy energy, and creates high entropy waste Is this true in ecosystems? –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 Fourth law of thermodynamics Matter is subject to entropy –Controversial in theory –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? –NYT Headlines: Data Barns in a Farm Town, Gobbling Power and Flexing Muscle –Power, Pollution and the Internet

Conclusion: The ultimate scarce resource is low entropy matter/energy

Low entropy/useful 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 converted to economic products 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

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 fund-service resources wear out, not used up Natural fund-service resources spontaneously restored by solar power Rate of use cannot be controlled

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 Stock-flows and fund-services are primarily complements, not substitutes

Macroallocation How much ecosystem structure should be allocated toward economic production, and how much should be left intact to provide ecosystem services? –Macro-opportunity costs: the ecosystem goods and services given up when we allocate structure towards economic production

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 (stock-flow resources) 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 Rival or non-rival is an innate characteristic of the good, not a result of institutions

Rivalness (cont.) Congestible resources –When abundant, one person’s use does not affect another’s. Appears non-rival. –When scarce, obvious that they are rival. –Empty planet vs. full planet

So What? Rival Non-rival ExcludableNon-Excludable Market Good: cars, houses, land, oil, timber, waste absorption capacity? Tragedy of the non- commons: 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. Open Access Regime: Oceanic fisheries, timber etc. from unprotected forests, waste absorption capacity Congestible Toll Good, club good: Roads, parks, beaches, etc. Open access regime (fund-services)