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SECTION III
General Natural Resource Issues
Chapter 6
Markets and Efficiency
Ch6: positive question; how markets function in
the case of natural resources
Ch7: normative question; public policy
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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.
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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
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(a) External Costs
a negative production externality
• 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 qm and pm (qm > q* ,
market quantity is too high; pm < p*, market price is
too low)
Page 91: Figure 6-3
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External Costs
a negative production externality
p
42
MSC = MPC + MEC
S =MPC
p* = 26
pm = 22
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D = MPB = MSB
0
Review ECO324-Ch15
128 160
q* qm
q of paper
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Consumption externalities
Production externalities
(c)
Positive
(d)
Negative
(b)
Positive
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
Review ECO324-Ch15
(a)
Negative
Wastes
being
dumped
into a
river by a
company
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(b) External Costs
a positive production externality
MPC
a
MSC = MPC + MEC
b
MPB = MSB
0
Review ECO324-Ch15
qm
q*
q
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(c) External Benefits
a positive consumption externality
($ millions)
MSC
K
p* = 175
MSB=MPB+MEB
pm = 170
L
MPB
0
Review ECO324-Ch15
qm = 200
q* = 210
q
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(d) External Benefits
a negative consumption externality
MSC
MPB
0
Review ECO324-Ch15
q*
qm
MSB = MPB + MEB
q
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Open-Access Resource
• 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. 1243-1248): Openaccess 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
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Open Access and the Dissipation of Resource Rent
• 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
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