Market Failures and Abiotic

Resources
Abiotic resources provided by nature

1. Fossil fuels (nonrenewable stock)

2. Minerals (partially recyclable, nonrenewable stock)
3. Water (nonrenewable stock, and/or fund, depending on
use, recyclable)
4. Solar energy (indestructible fund)
5. Ricardian land (indestructible fund)
 Fossil fuels
• Fossil fuels are both rival and excludable.

• The optimal allocation of fossil fuels would simply be the intersection of

the demand curve with the supply curve, where the supply curve would
equal marginal extraction costs (MEX).
But problem starts because of negative
externalities of fossil fuel
Mineral Resources
 Thoughts??

• How negative externalities will lead to a market

failure?

• How can we reduce negative externalities arises

through mineral uses?

• Do you think Recycling can be a good solution in light

of Ecological Economics?
 Freshwater
• An elastic demand is one in which the change in quantity demanded due to a change in
price is large.
• An inelastic demand is one in which the change in quantity demanded due to a change in
price is small.
 Thoughts??
• Does Ecological Economics supports controlling
resource use through high price (traditional economic
approach)?

• Does this approach hamper “resource allocation”

efficiently to all income group?

• Does this approach promote “private market”?

• What could be the solution in light of Ecological

Economics?
 Ricardian Land
• “Ricardian land” simply means as a physical space capable of
capturing sunshine and rainfall, and not the various productive
qualities (ex. Soil fertility) inherent to the land itself.

• How land property rights can influence market failure?

• Does unsustainable land management leads to a market

failure?
 Solar Energy
• Does land ownership and management has any effect on Solar energy
capture and uses?

• In what sense solar energy is both rival and excludable in nature?

• Does land uses affect the spatial distribution of solar energy?

• How Solar energy can be linked with market failure?

Market Failure and Biotic Resources
[Fisheries and Forest]
 Renewable Resources:
Forest resources
[Consider commercial forestry]
Time of harvesting, as well as both economic and
ecological considerations, are important in forest
management and market failure.
When to harvest trees for timber?

Culmination point

Economic rotation

Mean Annual Increment [MAI]

Current Annual Increment [CAI]

Age [Time]
 One year’s growth is called CAI, this term is generally used for volume increment. CAI is
the amount by which the vol of a stand increases in one year.

 If the time to which growth is related with the age of a tree, the average obtained by
dividing the total vol. by the total age and is termed as Mean Annual Increment (MAI).

 According to the biological phenomenon, the CAI remains slow in the early age,
becomes faster beyond that and shoots up in the youth to maturity period until it
reaches culmination point from where it decreases onwards.

 The MAI, on the other hand, increases at a steady rate and reach the culmination point
much later than CAI.

 The point of intersection of CAI and MAI indicates the age beyond which it is not
economical to retain the tree in the forest; it is called the Economic Rotation for that
particular spp at a site.
 Discussion
• How deforestation is linked with market
failure?

• How harvesting time of plantation can

influence market?
Fisheries
 Basic Terms
 Population biology the study of how the population of a
species changes as a result of environmental conditions.

 Logistic curve/logistic growth an S-shaped growth curve

tending toward an upper limit.

 Carrying capacity the level of population and consumption

that can be sustained by the available natural resource base.
 Species Population Growth Overtime

If food supply is
abundant,
temporary
increase can be
observed.
Population grow at However, will
a steady rate start to decline
when there will
be less food
supply and
competition.

Minimum population
required for survival

If population start
to falls below the
critical Xmin level, Inflection point.
it will extinct. Here annual
growth decline
&
population
stock reach to a
upper limit
 Maximum Sustainable Yield (MSY)
Maximum sustainable yield
(MSY) the maximum quantity of
a natural resource that can be
harvested annually without
depleting the stock or population
of the resource.

Arrows in the curve indicates

changes in population growth
Annual growth rate

Unstable/natural
Unstable Equilibrium. In a
equilibrium natural condition,
smaller population
will grow and while
a larger population
Stock [Population size] will shrink.
 Discussion
• Which factors have made this problem
especially severe in the modern period?
• How can this issue be related to market
failure?
• How we can improve fisheries management in
light of Ecological Economics?
Common Property Resources (Biotic)
and market failure
 Common property resources
 Available to everyone but one person’s uses diminishes other
people use (rival)

 Overuse is often a problem (e.g. overfishing, overgrazing).

 Garrett Hardin (1968) has called this problem “The Tragedy of

Commons”

 “Tragedy of commons” is essentially about open access

resources to which everyone has access without any limitation
and regulation.

 Open access resources are usually confused with Common

property resources; but common property resources are not
necessarily open access.
 How to manage common property
resources?

Challenges involves in common property

resource management?
How to sustainably manage
common property
resources??
Governance of Common Property Resources
(CPR)- Prof. Elinor perspective

“The use of common property resources may be

regulated by customs, traditional rules, social
norms of communities (Prof. Elinor Ostrom,
Nobel Prize Winner 2009)”.
Governance of Common Property Resources
(CPR)- Prof. Elinor perspective

 Given the right form of institutions, Ostrom suggests, the commons can be
managed from the “bottom-up” perspective for a shared prosperity.

 For ex. she demonstrated the importance of involving farmer-users in

the design and management of irrigation systems for successful local
resource management policies in Nepal.

 Work in Asia demonstrated that large, centralised and essentially top-

down government management systems tended to underperform, with
lower rates of return on investment than systems where incentives to
engineers were aligned to those of local farmer-users with their active
participation.
‘Polycentric Systems of Governance can make CPR
sustainable if it consider “Bottom-up” approach’--
Prof. Elinor’s findings
Note: Vincent Ostrom, Charles Tiebout, and Robert Warren (1961) introduced the
concept of “Polycentricity.” Vincent Ostrom is the Husband of Prof. Elinor

Source: Morrision et al. 2019

Fig. Key concepts and dominant interpretations of power relevant to polycentric environmental governance.
Source: Morrision et al. 2019
 “Five Rights” of CPR users-
Prof. Elinor’s proposal

 Access – the right to enter a specified property,

 Withdrawal – the right to harvest specific products from a

resource,

 Management – the right to transform the resource and

regulate internal use patterns,

 Exclusion – the right to decide who will have access,

withdrawal, or management rights, and

 Alienation – the right to lease or sell any of the other four

rights.
 Conditions for better CPR- Prof. Elinor’s proposal

 Most users of a resource should be involved in devising rules for

managing the resource.

 There should be monitors of the resource, accountable to the

resource users, who periodically evaluate conditions.

 There should be mechanisms to resolve conflicts that are responsive

and low-cost.

 Rules for managing the resource should be adapted to local

conditions.

 There should be graduated sanctions for resource users who violate

the rules.
 Discussion…
• How stock and flow of biotic (renewable)
resources can influence market?

• How to manage our biotic resources so that

we don’t face market failure?