1 Chapter 6 Markets and Efficiency Ch6: positive question; how markets function in the case of natural resources Ch7: normative question; public policy SECTION III General Natural Resource Issues

1. Market Demand and Supply Demand curve – downward slope illustrates diminishing marginal willingness to pay – It reflects consumers’ incomes, tastes, and other economic factors Supply curve – upward slope reflects increasing marginal production costs – Its exact shape is related to input prices, technologies, etc. 2

2. Markets and Static Social Efficiency If a market equilibrium means social efficiency, – then market demand curve = MSB curve: there are no sources of social value that are not registered by market participants themselves – and market supply curve = MSC curve: there are no sources of cost to members of society that are not registered in those private cost/supply curves 3

Consider a collection of paper mills located on a river – They produce paper: marginal supply curve is marginal private costs (MPC) curve – Paper mills emit residuals into the river which lead to damages suffered by downstream communities: downstream external costs (EC) – Marginal social costs (MSC) = MPC + EC – Socially efficient quantity and price are q* and p*; competitive market outcome is q m and p m (q m > q*, market quantity is too high; p m < p*, market price is too low) 4 (a) External Costs a negative production externality Page 91: Figure 6-3

5 p q of paper D = MPB = MSB 42 S =MPC MSC = MPC + MEC p m = p* = 26 0 q*qmqm External Costs a negative production externality

Consumption externalitiesProduction externalities (c) Positive (d) Negative (b) Positive (a) Negative The benefits to the rest of society of people being vaccinated before traveling abroad Noise pollution from using car stereos The benefits to the environment that arise from the planting of woodland by a forestry company Wastes being dumped into a river by a company 6

7 $ q MPB = MSB MPC MSC = MPC + MEC 0 q*qmqm b a (b) External Costs a positive production externality

8 ($ millions) MSC MPB MSB=MPB+MEB 0 q m = 200q* = 210 p m = 170 p* = 175 q K L (c) External Benefits a positive consumption externality

9 $ q MPB MSC MSB = MPB + MEB 0 q*qmqm (d) External Benefits a negative consumption externality

The resource that is open to unrestricted use by anyone who might wish to utilize it: ocean fishery, hunting, public parks… “The Tragedy of the Commons” (Garrett Hardin, Science, Vol. 162, 1968, pp ): Open- access externality that leads to overuse of the resource is the diminution in the quality of the pasture as more and more animals are out on it Page 95, Table 6-2, public beach: the fifth visitor reduces the value of the beach to the four already there, from $20 to $18 for each one 10 Open-Access Resource

Public beach example: efficient visitation level is 4 visitors; benefits – costs = $80 – $48 = $32 $32 is a return attributable to the resource itself (the beach); this is the resource rent produced by the beach If visitation level had risen to 8 people, then benefits – costs = $96 – $96 = $0; open access had led to the dissipation or disappearance of all natural resource rent 11 Open Access and the Dissipation of Resource Rent