The Nature of Natural The Nature of Natural ResourcesResources

NEEDS REVISIONNEEDS REVISION

AnnouncementAnnouncement

• A6 will be due a week from next Tuesday

__________ is a legal principle that when __________ is a legal principle that when enforced allows an owner to prevent others enforced allows an owner to prevent others from using his or her asset. __________ is from using his or her asset. __________ is an inherent characteristic of certain resources an inherent characteristic of certain resources whereby consumption or use by one person whereby consumption or use by one person reduces the amount available for everyone reduces the amount available for everyone else. 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 thermodynamicsLaws 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 thermodynamicsLaws of thermodynamics

• Second law tells us that things fall apart.– All production requires low entropy, 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 Fourth law of thermodynamicsthermodynamics

• Matter is subject to entropy– Controversial in theory– Somewhat realistic in applications

• 100% recycling probably impossible

BUT…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:Conclusion:

The ultimate scarce resource is The ultimate scarce resource is low entropy matter/energylow entropy matter/energy

Low entropy resources provided by Low entropy resources provided by naturenature

• Abiotic resources– Fossil fuels– Minerals– Water– Land– Solar power

• Biotic resources– Ecosystem goods– Ecosystem services– Waste absorption

capacity

What are the characteristics What are the characteristics of scarce resources of scarce resources

relevant to allocation?relevant to allocation?

Stock-Flow Resources Stock-Flow Resources (raw materials, ecosystem goods)(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

Fund-Service ResourcesFund-Service Resources(ecosystem functions, services, (ecosystem functions, services,

land, machines, labor)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 wear out, not used up• Natural F-S R spontaneously restored by solar

power• Rate of use cannot be controlled

Pizza examplePizza 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?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

MacroallocationMacroallocation

• 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

ExcludabilityExcludability

• 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.

RivalnessRivalness

• 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

• 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.)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?So What?

Rival

Non-rival

Excludable Non-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, timberetc. from unprotected forests, waste absorption capacity

CongestibleToll Good, club good:

Roads, parks, beaches, etc.

Free Rider Problem