1 Chapter 7 Public Policy for Natural Resources the collective actions that people undertake through governmental institutions to manage natural resource conservation and utilization in a market economy

1. The Objectives of Public Policy (1) Economic efficiency – It takes into account both the benefits and the costs of taking an action – The natural assets of society are being utilized in a way that maximizes their net benefits to the members of that society – Both market and nonmarket benefits are to be counted – It does not require that gross domestic product or gross community product (the total monetary output of people living within a given community) be maximized 2

(2) Equity – To be equitable means to be fair – It has to do with how the overall benefits and costs of natural resource use are distributed among subgroups of the overall population – Distributional disconnect: benefits are widely spread among the population while costs are localized; or benefits are localized and the costs are widely dispersed – How policies treat people who have different amounts of wealth 3

(3) Flexibility – Inflexible policy: the price for purchasing a mineral claim is still $5 an acre, just as it was when the mining was passed in 1872 – How well natural resource policies adapt to changing circumstances (changes on the demand side in terms of social factors and values that affect the WTP; changes on the supply side that affect the availability of resources) 4

(4) Enforceability – Sometimes the laws and regulations are unenforceable at a reasonable cost – Enforcement resources are always scarce; we cannot simply assume that enforcement will be carried out with ample resources 5

2. Types of Public Policies (I) Incentive-Based Policies – (A) Market/property rights policies: establishing and enforcing a new set of rules governing property rights and market transactions, and letting the rate of natural resource use be established by voluntary interaction among suppliers and demanders – (B) Government-sponsored incentive policies: public agencies employ such devices as taxes and subsidies to structure the incentives facing resource users 6

(II) Direct Public Action – (C) Command and control policies: public authorities establish direct controls in individual actions, enforcing these controls with standard legal enforcement practices – (D) Direct public production: public agencies themselves own natural resources and themselves pursue programs of production and distribution 7

In the case of open access that causes overfishing: 8 – (A) Market/property rights policies: the town would divide the bay area into a number of parcels and lease/sell them to fishers who would be free to make their own harvest decisions; the leaseholds may be bought and sold among fishers – (B) Government-sponsored incentive policies: the town could levy a tax per bushel of clams harvested; the tax becomes a new operation cost for clam diggers; the quantity of clams dug in the bay would decrease

– (C) Command and control policies: the town would establish a set of rules governing the harvesting of shellfish (rules for the maximum allowable individual harvest per day, for the minimum size of clam that could be kept…) – (D) Direct public production: the town or some other public agency might hire people to do the fishing, selling the clams, and distribute revenues itself 9

(A) Private Property Rights 10 In order to lead to socially efficient resource use, property rights must be – Complete: property rights must not be limited in any way that would reduce the incentives of the owners to search out the ways that maximize their value (one-year leases weaken leaseholders’ incentive to make long-run investment) – Enforceable at reasonable cost: would-be trespassers can be excluded at reasonable cost (the use of fences); owners can be effectively enjoined from using their property in illegal ways (clear cutting of timber)

11 – Transferable: the leaseholder can sell the farm land to third parties; otherwise, it reduces the incentive to maintain the maximum market value of natural assets since they are not marketable – Combined with a complete set of competitive markets: a piece of forest land produces biodiversity preservation services; markets for agricultural land and suburban land are well developed, meaning that there are well-recognized prices for forest land devoted to these uses; forest land prices will reflect ecological services

12 Taxes – Before tax: Table 7-2, page 109—aggregate-net- return-maximizing number of fishers is 4, but the open-access number of fishers is 8 because net returns per fisher are positive up to this point – With a charge of $7 per day per fisher: in an open- access situation entry will increase up to the point where marginal cost ($12+$7=$19) equals average harvest value (catch per fisher). This occurs at a rate of 4-5 fishers. The socially efficient number of fishers is also 4 (B) Government-Sponsored Incentive Policies

Review Questions 1. Suppose that making shoes creates pollution, a negative externality. To incorporate the externality in a market graph we would a. Add the externality cost to the market demand curve b. Subtract the externality cost from the market demand curve c. Add the externality cost to both the market supply curve and the market demand curve d. Add the externality cost to the market supply curve 13

2. If a business generating pollution is charged a tax per unit of pollution, a. The business will be forced to declare bankruptcy b. The business will raise its prices and produce less of the polluting good c. The business will be less likely to invest in pollution-reducing technologies d. The business will raise its prices but produce the same quantity of the polluting good 14

15 Subsidies – A payment to individuals in return for their reduced use of the resource in question; the objective is to affect the rate at which the resource is used

16 Example: only the first 4 fishers to apply would be allowed and after that no further entry would be permitted Figure 7-1, page 117: D and S determine market quantity of q m ; there are ecological costs associated with producing timber, so, MSC is above S, socially efficient output is q*. A regulation is therefore stating that the maximum allowable production is q* (C) Command and Control Policies

17 Problems (Figure 7-1, page 117, continued): – Information burden: The regulators must have good knowledge about private production costs, nonmarket ecological costs that the market is currently leaving out, and the market demand curve – Enforcement: at q*, since p 2 (market price) is bigger than p 1 (marginal production costs), any producer that can find a way to produce one more unit will profit by p 2 - p 1 (incentive to be noncompliant)

18 Examples: public parks at community, state, and national levels, national forests, national monuments…… Often takes the form of allowing private firms to have access to public domain resources under controlled conditions The legal title to the situ resources remains for the most part with the public, but the extraction is actually done by private firms (D) Direct Public Production

3. Market Failure/Government Failure Market failure: when externalities and public goods are present, private markets are incapable of operating efficiently and public policy is called for Government failure: public policies in practice are never likely to give the results that they would appear to promise in theory. Government failure can happen in many ways: – Regulations are enacted but inadequately enforced – Regulations create perverse incentives, making the situations worse – Regulations are redistributive; they are attempts by one group to wrest resources away from another group – Public agencies cannot get required information 19

Modeling a Pigouvian Tax (on a negative production externality) 20 $ Q of gasoline MPB = MSB MPC MSC = MPC + MEC 0 QEQE QCQC MPC t b a Amount of tax

Modeling a Subsidy (on a positive production externality) 21 $ Q of trees MPB = MSB MPC MSC = MPC + MEC 0 QEQE QCQC MPC s b a

Modelling a Pigouvian Subsidy (on a Positive Consumption Externality) 22 ($ millions) MSC MPB MSB=MPB+MEB 0 Q C = 200Q E = 210 P C = 170 P E = 175 Subsidy = $14 million MPB S Q of scrubbers P E – s = 161 K L

Modeling a Tax (on a negative consumption externality) 23 $ Q MPB MSC MSB = MPB + MEB 0 QEQE QCQC MPB t b a Amount of tax

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 (and pp in our text) Wastes being dumped into a river by a company 24