Introduction to Agricultural and

Natural Resources
Natural and Environmental Resources
FREC 150
Dr. Steven E. Hastings
 Natural and Environmental Resources

• This Outline Covers Chapter 10 in Penson et al.

• Major Topics
– Definitions
– The Role of Government
– Market Failure
• Externalities
• Common Property Resources
• Public Goods

• Summary
 Natural and Environmental Resources

• Introduction

– Many natural and environmental resources have unique characteristics .

– Some of the economic principles and model we have studied do not work well.

– Over the years, revised models have been developed.

– Government policies have been developed.

 Natural and Environmental Resources

• What are natural and environmental resources?

• Natural Resources are products of nature rather than products of industry. Examples include:
ores, fossil fuels, land, water and timber.

• Society uses these resources to produce goods and services demanded by consumers. Thus,
decisions made by society (agriculture, other industries, the public, etc.) affect the quantity
and quality of natural resources.

• An important distinction in natural resources is their “renewability”:

– Renewability Resources – if properly managed, these resources can provide inputs to our
economic system indefinitely (forests, fish, water, wildlife, sun light, etc.)
– Nonrenewable Resources – a finite stock exists (ores, coal, oil, gas, etc.), Society must conserve or
find substitutes.
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• A nonrenewable resource reaches economic exhaustion when the cost of using it

exceeds it’s value to society (price).

• Example – the cost of mining coal is more that people are willing to pay for it as an
energy source.
Wood is Everywhere!
Agricultural Interactions
 Natural and Environmental Resources

• The Role of Government

• Generally, government provides “collective goods”

– Provide stable economic, social and legal systems (that facilitates the efficient working of
markets).

– Promote equity in the distribution of output.

– Establish and enforce property rights (the right of a individual, business, etc. to own and
control the use of property (land, car, house, etc)).

• With little government intervention, competitive markets will work fine for most resources
and goods and services. However, with many natural and environmental resources, the
competitive market fails: it does not provide an optimum use of resources or production of
goods and services for society.
 Natural and Environmental Resources

• Market Failure

• Market failure occurs when the market (price) system fails to provide an optimum for society.

• Can occur in resource and/or product markets.

• Reasons include: no well-defined exclusive property rights, property rights not enforced, no
market for exchange, etc.

• Major types:

– Externalities

– Open Access Resources

– Public Goods
 Natural and Environmental Resources

• Externalities

• An externality is a positive or negative effect of the actions of one

individual, firm or nation on another without compensation.

• Examples of negative (-) externalities: smoking, pollution, noise, erosion,

loss of habitat, scenery, etc.

• Positive (+) externalities: education, research, etc.

 Natural and Environmental Resources

• What is the optimum amount of a negative externality (pollution)?

• There are many “models” used to discuss externalities . This one continues with familiar
concepts (marginal costs and marginal revenue).

• New variation on “costs”.

– Internal Costs – costs a firm has to pay.

– External Costs – cost of resources a firm uses but does not have to pay (no laws, no
enforcement, no well-defined lack of property rights.

– Assume that increased output means increased pollution.

• From society’s perspective, all costs (social costs) should be considered in determining the
optimum amount of output (and pollution). See Graph.
Natural and Environmental Resources
 Natural and Environmental Resources

• Optimum Level of Output and Pollution

• Optimum for the Firm: Marginal Internal Costs (MIC) = Marginal Social
Benefit (MSB)

• Optimum for Society: Marginal Social Costs (MSC) = Marginal Social

Benefits (MSB). A lower level of output!

– At lower levels of output, MSC < MSB; OK to increase output.

– At higher levels of output, MSC > MSB; want to reduce output.

• Is the optimum level ever zero output? What has to be true?

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• Approaches to Achieving Optimum

– Do Nothing - usually done for minor externalities

– "Internalize" Externality – make the damaging entity responsible for costs.
– Education - "Only you can prevent forest fires.", S. Bear.
– Investment – new technology!
– Taxes or Subsidies – firm pays for externality or society pays to reduce the externality.
– Regulations - set limits on externality or specify production methods.
– Establish a market - tradeable permits for emissions

• Many problems with identifying costs and optimum: many polluters contribute, may cross
state national boundaries, source of pollution uncertain (nonpoint sources of pollution).
 Natural and Environmental Resources

• Many problems with identifying social costs:

– many polluters contribute (farmers, firms, houses, etc.)

– may cross state and national boundaries (Acid Rain)

– “nonpoint sources of pollution” - sometimes, the sources of pollution

are unclear (farmers, firms, houses, etc.)
 Natural and Environmental Resources

• Open Access Resourceshttp://en.wikipedia.org/wiki/Common-pool_resource

• Open access resources are those for which no property rights are specified;
they not owned by any one; and no one has control over their use.

• Examples: ocean, air, etc.

• For these resources, property rights (ownership) are difficult or impossible

to determine.

• Problems are conflicts over the use of these resources:

– Incompatible uses (fishing vs. dumping wastes, hiking vs. dirt biking).

– Excessive use by one group or another (over fishing, over harvesting timber).
Other Resources

Common Pool Resource http://en.wikipedia.org/wiki/Com

mon-pool_resource

Tragedy of the Commons http://en.wikipedia.org/wiki/Trage

dy_of_the_commons
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• Alternative Solutions

– Do Nothing - usually done if resource is not scarce.

– Create Private Property Rights - may not be possible.

– Alternative Management Approaches

• Government Management - typical for common property in the U.S.,

called public lands (timber land, rangeland mining rights, etc.); managed
by government agency; really owned by all Americans; use becomes
politically driven instead of market driven.

• Collective Management - Common property is property owned by a

group; to manage it need to determine a group to control the resource
and a procedure to make decisions. Civic association responsible for green
space or snow removal.
 Natural and Environmental Resources

• Public Goods

• A public good is a good or service that once it is produced is available for everyone to
use regardless if they pay to use it or not; use can not be excluded.
• Examples: national defense, light-house, education, schools, etc.

• Public Goods are distinguished from private goods by two characteristics:

– Nonrivalry – consumption by one individual does not reduce the amount available for others.
– Nonexcludability – if the good can be consumed by one individual, then others can not be
excluded form consuming it.

• Many goods and services have some degree of these characteristics. Public goods have
high degrees of both.
• Examples: Private Good – a shirt. Public Good – scenic view
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• Problem for the private market is that they can't charge a price (no revenue); have free riders
- users that used the good or service but do not pay for it.

• Most public and "quasi-public "goods provided by the government because private market
system doesn't produce optimum output.

• What is the “optimum amount” of a public good?

• The determination requires that individual benefits (demand) be aggregated “vertically”

(because use cannot be excluded) and equated with costs. Individual price is impossible to
enforce because of free riders. See Graph.

• How to pay for a public good?

•
– Taxes - everyone pays for use.
– User Fees - can be used in some instances to recover costs (toll on bridge, admission fee
at park, etc.)
Natural and Environmental Resources
 Natural and Environmental Resources

• Summary

• Natural and environmental resources have unique economic issues that must be
considered for optimum use.
• For most resources, private property rights can be assigned and enforced. In
general, the private market system (price) properly allocates these resources to
satisfy society's wants optimally.
• However, for some natural and environmental resources the private market system
(price) does not produce the optimum outcome. The market system fails! In these
cases, the government needs to intervene.

• LOTS of Examples!