The Nature of Natural Resources

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 things fall apart. – All production requires low entropy, and creates high entropy waste –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 –Somewhat 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?

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

Low entropy 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 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 Characterized by risk

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 F-S R wears out, not used up Natural F-S R spontaneously restored by solar power Rate of use cannot be controlled Natural F-S R characterized by uncertainty and ignorance

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 They are not substitutes

Macroallocation How much ecosystem structure should be allocated toward economic production, and how much should be left intact to provide ecosystem services?

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 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 Non-rival but congestible –Do such resources exist? Rival or non-rival is an innate characteristic of the good, not a result of institutions

Rivalness (cont.) Non-rival but congestible –Non-rival as long as few people use it, becomes rival with excessive use –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 Non-rival congestible Toll Good, club good: Roads, parks, beaches, etc. Free Rider Problem