Natural Resources and The Environment

Customary supply and demand graphs show how rapidly a good is being consumed. For exhaustible natural resources, conservation takes place when the quantity on the horizontal axis moves to the left. Conservation can be achieved by shifting the supply curve on such a graph to the left. 

The cost of extracting a resource is one of the forces affecting the location of the supply curve. Easily accessible deposits, with low extraction costs, are generally used first. So, other things being unchanged, as more and more of the resource is used, the supply curve for an exhaustible resource     tends to shift to the left and encourages conservation.

As exhaustible natural resource prices rise, it pays firms and individuals to search more vigorously for new deposits of the resource. For this reason, "proven reserves " often increase as prices rise. 

The conservation effect of shifting the sup  ply curve to the left is greater when the price elasticity of demand for the resource is high, and it is smaller when price elasticity is low. Since price elasticity of demand is usually greater as the length  of time increases, conservation effects of supply curve shifts increase with the passage of time.

Low interest rates encourage the conservation of exhaustible natural resources, and high interest rates discourage conservation, other things being equal. This is so because high interest rates mean, for resource owners, that alternative uses of their wealth are more attractive than leaving that wealth in its natural state as a resource.

Because interest rates reflect time preferences and the productivity of capital goods, they provide a connection between resource conservation and other aspects of an economic system. Conservation of exhaustible natural resources is just one aspect of the many different choices between the present and the future.

Interest rates may fail to provide appropriate guidelines for conservation. Central bank policies, government budget surpluses or deficits, and tax policies relating to saving and investing all can influence the real interest rate in the economy. 

Monopoly power exists in some natural resource markets. Since monopolistic firms tend to restrict output in order to increase profits, they may help to conserve exhaustible natural resources. However, much depends on the specific circumstances and policies followed by these monopolistic enterprises.

Government tax policies and price controls can affect the conservation of exhaustible natural resources. U.S. preferential tax treatment for natural resource extraction may have speeded up the use of some resources. However, price controls on natural gas and on oil may have slowed down the use of these resources. 

For renewable resources, conservation calls for attention to the economic factors that determine the conditions for the reproduction and growth of such resources. Because property rights are not clearly defined in some areas, human activities may have reduced renewable resource habitats too much and worked against the conservation of these resources.

Conservation of renewable resources also may require some limitations on the annual harvesting of these resources. The sustainable - annual yield curve shows the quantities that may be harvested without causing a change in the population of the species. To conserve the species, harvesting should not be allowed to exceed the sustainable yield.

The common property system sometimes fails to ensure that harvesting of renewable resources does not exceed the sustainable yield. Government regulations may be used to limit harvesting in common property areas. Extending the scope of private property rights is another way the control harvesting. The concept of a reservation price shows how property rights build future interests into present decisions about resource use.

The laws of the conservation of energy and matter suggest that waste treatment cannot reduce the total amount of waste but can change the forms and locations of waste dispositions.

The demand for nature's waste-disposal services is derived from the demand for the goods and services that produce the waste. Waste disposal generates social costs through its disruption of natural ecological systems. In economic terms, the efficient quantity of nature's waste-disposal service is achieved when the value of the marginal unit of waste-disposal service, as indicated by the demand curve, is equal to the social cost of that unit.

Waste-disposal charges (effluent charges) can make up for nature's inability to charge a price as a condition for disposing of waste. Correct effluent charges can establish a supply curve and bring about the efficient quantity of waste-disposal service.

Externality problems arise in waste disposal because property rights are not well established or enforced for waste disposal into public areas. Government can improve the efficiency of waste disposal by exercising property rights in areas where private property rights are not established.

Effluent charges lead to price rises to producers and consumers for goods and services that generate harmful externalities. In this way they provide incentives for consumers' to switch to other goods and services and for producers to find methods of production that cause less waste. These are attractive features of effluent charges. Developing reliable estimates of the actual demand and costs of waste is the main problem with these charges.

Standards and controls are a means of limiting waste by specifying product characteristics and methods of production and waste treatment. These methods of controlling the volume of waste are attractive politically. However, economists are critical of standards and controls because they tend to lock production and treatment methods into current technologies and to offer little incentive for developing better technologies.

Subsidies for waste treatment are criticized by economists because they tend to lower costs to producers and prices to consumers of goods that generate waste and in this way tend to increase the total volume of waste.