IMPORTANT CAVEATS

3.7 IMPORTANT CAVEATS

It is important to note that while the analysis presented in Chapters 2 and 3 allowed us to understand the basic elements necessary to comprehend the mainstream economic notion of resource scarcity and its measurement, it did so with several obvious limitations. The most significant of these are the following:

First, the economic analysis thus far has been strictly static; no time element has been considered. This is

a major drawback given that natural resource economics, by its very nature, deals with the intertemporal allocation of resources—that is, how natural resources are managed over time. This particular issue will be the subject of Chapters 16 and 17 : intertemporal allocations of renewable and nonrenewable resources, respectively. Second, the economic analyses in both the product and factor markets were done assuming the existence of perfectly competitive markets. Given this institutional setting, we observed that private decision-making would actually lead to a socially optimal allocation of resources. Furthermore, there will be no discrepancy between the individual (private) and social assessment of benefits and costs. But what happens if the conditions for perfectly competitive markets fail to materialize? As we will see in Chapter 5 , one consequence of this is to create a divergence between the social and private assessment of costs and benefits. This is crucial because evaluation of natural resource adequacy will be sufficiently addressed only

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when benefits and costs reflect social, not private, consideration. What this creates is a doubt concerning the effectiveness of the market system where resource allocation is solely based on private assessment of benefits and costs.

Third, in the economic analysis so far, nothing has been said about resources that have values but may not be captured through the normal operation of the market system. An example would be the value of preserving an animal species such as the northwest spotted owl. A species of this nature has very little use value—benefits or satisfactions received by humans from a direct utilization of the services (or amenities)— and therefore is likely to be unaccounted under the normal operation of market processes. This particular issue becomes even more serious when it is realized that market prices are formed on the basis of human preferences alone. This issue will be dealt with in Chapter 14 .

Fourth, in Chapters 2 and 3 efforts were made to show how, at a point in time, prices for final products and factors of production, respectively, are determined through the free-market mechanism. To what extent information on current market prices could be used to predict future scarcity events has not been adequately addressed. More specifically, the uncertainty associated with predicting a future scarcity condition on the basis of past price trends has not been addressed. The position taken so far is that current resource prices are

a good predictor of future scarcity events. This would be the case in a world of perfectly competitive markets where economic agents were operating with perfect foresight and costless information. Under those circumstances,

if there is reason to judge that the cost of obtaining a certain resource in the future will be much greater than it is now, speculators will hoard that material to obtain future price, thereby raising the present price. So, current price is our best measure of both current and future scarcity.

(Simon 1996:30–1) Fifth, up to this point our discussions about natural resources have been done in broad generality. The term

natural resource was used to describe a heterogeneous group of resources. This is misleading, for in many cases knowledge about the crucial attributes that differentiate one group of natural resources from another is extremely important in making an economic assessment of resource adequacy. This is especially the case when the issue of irreversibility (the fact that beyond a certain threshold, the use of natural resources may lead to irreversible damage) is an important consideration. However, an understanding of irreversibility and other crucial properties of natural resources requires a basic grasp of ecology—the subject of the next chapter.