Lecture 5

Property Rights, Externalities, and Natural Resource Problems

Byeong-Hak Choe

bchoe@geneseo.edu

SUNY Geneseo

September 6, 2024

The Economic Approach: Property Rights, Externalities, and Natural Resource Problems

Externalities as a Source of Market Failure

Valuing mangrove conservation in southern Thailand

• Over half of 1100 hectares of mangrove swamps cleared for commercial shrimp farms in Tha Po village, Surat Thani Province, Thailand.

• Consequences of mangrove destruction:

  • Decline in fish catch
  • Increased storm damage
  • Water pollution

Externalities as a Source of Market Failure

Valuing mangrove conservation in southern Thailand

• Economic analysis (Sathirathai and Barbier, 2001):
  • Value of mangrove ecological services: $27,264–$35,921 per hectare
  • Economic returns to shrimp farming (corrected for subsidies and pollution costs): $194–$209 per hectare
  • Financial returns to shrimp farmers (with subsidies, ignoring external costs): $7,706.95–$8,336.47 per hectare
• Key finding: Preserving remaining mangroves is more economically efficient

Externalities as a Source of Market Failure

Valuing mangrove conservation in southern Thailand

• Problem: Shrimp farmers, due to subsidies and not bearing external costs, are incentivized to convert mangroves

• Conclusion: Without regulation or collective action, conversion to shrimp farming will continue despite being socially inefficient

• Communities in Thailand are restoring degraded mangrove forests to grow and harvest clean, healthy shrimp. (National Geographic, 2016)

  • If mangrove forests are so beneficial to coastal Thai communities, why have so many forests disappeared?
  • Why aren’t all Thai or other Southeast Asian fish farmers embracing reforestation?

Externalities as a Source of Market Failure

Alternative Property Right Structures and the Incentives They Create

• Private property is not the only regime of defining entitlements to resource use.

  • State-property regimes:
    • Governments own and control property.
  • Common-property regimes:
    • Property is jointly owned and managed by a specific group.
  • Res nullius or open access regimes
    • No one owns or exercises control over the resources.

Externalities as a Source of Market Failure

Alternative Property Right Structures and the Incentives They Create

• State-property regimes exist to varying degrees in virtually all countries of the world.
  • Parks and wilderness preserves, for example, are frequently owned and managed by the government.
  • Problems with efficiency can arise in state-property regimes when the incentives of bureaucrats, who implement and/or make the rules for resource use, diverge from the collective interests of society as a whole.

Externalities as a Source of Market Failure

Alternative Property Right Structures and the Incentives They Create

• Common-property resources are shared resources that are managed in common rather than privately.
  • Entitlements to use common-property resources may be formal, protected by specific legal rules, or they may be informal, protected by tradition or custom.
  • Common-property regimes exhibit varying degrees of efficiency and sustainability, depending on the rules that emerge from collective decision making.
  • While some very successful examples of common-property regimes exist, unsuccessful examples are even more common.
  • Successful examples of a common-property regime often involves rules founded on reciprocity and trust among community members.

Externalities as a Source of Market Failure

Alternative Property Right Structures and the Incentives They Create

• Res nullius property resources, or open-access resources by definition do not have a process for controlling access to this resource, because no individual or group has the legal power exercise that control.

• Open-access resources have given rise to what has become known popularly as the “tragedy of the commons”.

Externalities as a Source of Market Failure

Alternative Property Right Structures and the Incentives They Create

• Bison are an example of “open-access, common-pool” resources.

• Common-pool resources are non-excludible and rivalrous.

  • A good is excludable if the provider of the good can prevent people who have not paid for it from using or consuming it.
  • A good is rivalrous if its consumption by one individual reduces its availability for consumption by others.

Externalities as a Source of Market Failure

Alternative Property Right Structures and the Incentives They Create

Externalities as a Source of Market Failure

Alternative Property Right Structures and the Incentives They Create

Northern and Southern Herd of Bison in 1865

• In the early history of the United States, bison were plentiful; in the absence of scarcity, efficiency was not threatened by open access.
  • Over time, the demand for bison increased and scarcity became a factor.
  • As the number of hunters increased, eventually every additional unit of hunting activity increased the amount of additional time and effort required to produce an additional yield of bison.

Externalities as a Source of Market Failure

Alternative Property Right Structures and the Incentives They Create

• Surplus is measured as benefits (or revenues) received from the harvest minus costs.

• Total benefit is calculated by multiplying the price per bison by the number of bison harvested at each level of hunting.

• The upward-sloping total cost curve reflects the fact that increases in harvest effort result in higher total costs.

Externalities as a Source of Market Failure

Alternative Property Right Structures and the Incentives They Create

• Marginal benefit curve is downward sloping because as the amount of hunting effort increases, the bison population size decreases.
  • Smaller populations support smaller harvests per unit of effort expended.

Externalities as a Source of Market Failure

Alternative Property Right Structures and the Incentives They Create

• The efficient level of hunting activity in this model, \(E^{*}\), maximizes the surplus.
  • Maximizes the distance between benefits and costs in the top graph.
  • Marginal benefit equals marginal cost in the bottom graph.

Externalities as a Source of Market Failure

Alternative Property Right Structures and the Incentives They Create

• Under open-access, individual hunters lack the incentive to preserve the surplus by limiting their hunting efforts.
  • This leads to exploitation until total benefits equal total costs (\(E_{OA}\)).
• Overexploitation occurs because hunters cannot capture the surplus.

Externalities as a Source of Market Failure

Alternative Property Right Structures and the Incentives They Create

• In the presence of sufficient demand, unrestricted access will cause resources to be overexploited

• The surplus is dissipated—no one is able to appropriate it, so it is lost.

• Unlimited access destroys the incentive to conserve.

  • A hunter who can preclude others from hunting his herd has an incentive to keep the herd at an efficient level to preserve the surplus.