Download Efficient Markets & Natural Resources: Characteristics, Externalities, Sustainability - Pr and more Assignments Economics in PDF only on Docsity! Economics 480/580 J. Miranowski Problem Set I Due: September 23, 2008 I. Discussion Questions: 1. What four characteristics of well-defined property rights are essential to the function of efficient markets? Why is each of these characteristics necessary for efficient markets? Comprehensive Exclusive Transferable Secure 2. Incomplete markets fail to allocate resources efficiently. What are the sources of incomplete markets and why do they cause problems in allocating resources efficiently? Externalities – individuals do not incur all the costs or realize all the benefits of their actions. Public goods – non-exclusive and non-rival in consumption. Free rider problems and aggregate demand is vertical summation of individual demand curves. Common property resource – impure public good with group rights that is rival in consumption, open access to group, and overused. Asymmetric Information – moral hazard and adverse selection violate axioms of efficient markets. Non-convexities in markets and regulations. Uncertainties – cannot be addressed in contingent markets. Monopoly – under production and overpricing from social welfare point of view. 3. Are we running out of natural resources? (Justify your answer and distinguish between nonrenewable commodity and amenity resources.) We show no evidence of economically exhausting commodity resources, which include fossil fuels, minerals, and farm commodities. Real prices for these resources have been declining over time except for short run blips caused by constraints on free functioning of competitive markets. This result is due in large part to induced technological change and input substitution designed to save the more scarce inputs. Amenity resources, such as Yellowstone National Park or the Grand Canyon, are natural wonders that are fixed in supply. Growing population and incomes will increase demand over time while supply remains fixed. Further, any decision to develop these resources is largely irreversible and will thus “exhaust” the resource. Thus, their real price and value is increasing over time and they are becoming scarcer. 4. Define and distinguish between the “weak sustainability” and “strong sustainability” hypotheses. Based on the readings and our class discussions of resource scarcity and economic sustainability, which hypothesis does the existing empirical evidence tend to support? Provide “economic evidence” to support your contention. Weak sustainability – resource use of previous generations should not exceed a level that would prevent subsequent generations from achieving at least as great a level of well-being. Requires that all the rents derived from the use of depletable resources be reinvested in capital to maintain the total capital stock level and achieve constant consumption over time. Assumes that all forms of capital are perfect substitutes. The economic significance is economies can deplete their depletable resources as long as they invest the rents and still sustain their level of well-being. Strong sustainability – value of remaining stock of natural capital should not decrease to maintain sustainability because there is a lack of substitutability between natural and physical capital. Sometimes stated in terms of maintaining physical flows of different forms of natural capital. Much more restrictive definition of sustainability that is difficult to satisfy. If we are considering commodity resources, weak sustainability makes more sense. If we are considering amenity and environmental resources, strong sustainability is more defensible. 5. Explain what is meant by the following statement: “The market system sends out signals that induce technical change and substitutions.” How does this process augment scarce resource? Research and development efforts focus on saving the scarce inputs or resources in both the industrial and household production processes. When the price of a particular input rises relative to other inputs, the higher price induces research that will save the scarce input and causes producers and consumers to substitute away from the scare input.
