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Dr. Harry Hillman Chartrand, PhD

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h.h.chartrand@compilerpress.ca

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Launched  1998

 

 

                              ENVIRONMENTAL & NATURAL RESOURCE ECONOMICS 271                   

3.0 Natural Resource Economics

3.0 Natural Resource Economics

3.0 Introduction

3.1 Agriculture

3.2 Fishing  

3.3 Forestry

3.4 Mining

3.5 Recyclables:

3.6 Links

3.0 Introduction

At first glance, natural resources have no relationship to knowledge. By definition, they exist as John Locke said in “the State that Nature hath provided” (quoted in Dooley 2002, 4). They are just part of the environment until the knowing mind recognizes them as useful. Thus oil lay in the ground virtually untapped until invention of the internal combustion engine. Just as we recognize a tool by its purpose (M. Polanyi 1962, 56), we similarly identify natural resources by the human ends we attribute to them. At a given point in time a naturally occurring substance is seen as nothing but an environmental feature. Take a pathway through the jungle one day and you see a large rock outcrop. The next day, with new knowledge, the same path leads not to an environmental feature but to a bauxite deposit that can be converted into aluminum. It has become a toolable natural resource. Yet it itself has not changed, one day to the next, rather new knowledge allows us to see it in a different light.  This ‘changed way of seeing’ is captured by Loasby when he writes:

Menger begins by arguing that an object becomes a good only when someone discovers how to use it to satisfy some human need. Goods are endogenous, created by new connections between human need and physical or human resources; and their value is derived from the need which each of them serves and - crucially for this paper - from the knowledge that it can serve this need and also the knowledge of how it can be made to do so… The creation of goods, and of technology, rests on the creation of knowledge, and therefore on previous uncertainty - or indeed sheer ignorance.” (Loasby 2002, 6)

Today the most striking example of how new knowledge transforms environmental features into toolable natural resources is biotechnology.  While advances in analysis and sequencing now allow researchers (and hence firms) to experiment with known genetic command codes to build new drugs, enzymes, pathways, proteins et al, the reality is that the raw material for biotechnology is life itself – everywhere and every when. Nature is much older and more experienced in designing command codes under a wide range of environmental conditions than emergent biotechnology. Accordingly Nature has become the object of search by the biotech industry for novel code. This search is called ‘bioprospecting’ and takes two forms: ethnobiology and ‘original research’ which is self-explanatory.

Ethnobiology is the interdisciplinary study of how human societies use or have used flora and fauna to serve human purpose, e.g., for medical or nutritional purposes. Its principal sub-disciplines include ethnobotany, ethnomycology, ethnolichenology, ethnozoology, ethnoecology, paleoethnobotany, and zooarchaeology. The Society of Ethnobiology publishes a journal documenting activities in these fields.

Ethnobiology draws heavily on the knowledge of historical, pre-modern and/or indigenous peoples of the Third and Fourth Worlds. Such knowledge is generally called ‘traditional ecological knowledge’ or TEK. With the 1991 Convention on Biological Diversity (CBD) the principles of compensated bioprospecting were established globally with the notable exception of the United States which is not a member of the Convention. The convention recognizes ownership of biological forms like mineral deposits by the Nation-State in which they are found. Efforts by the World Intellectual Property Organization and UNESCO to cede TEK rights to indigenous peoples themselves rather than the Nation-State in which they live have, so far, failed.

In 1995 with the founding of the World Trade Organization (WTO) and its Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) a conflict developed with the CBD. Under Common Law and Civil Code intellectual property rights can only be granted to a Person – natural or legal – and only for a limited period of time. The idea that such rights could reside in traditional knowledge that lasts forever and belong to a collective such as a tribe or indigenous nation is therefore rejected by TRIPS. Similarly, to qualify for protection knowledge must be novel and not the documented subject of previous art. Given that most TEK is oral in nature (or written in obscure ancient languages) this means that biotech firms can, for example, patent the active ingredients of traditional medicines as well as crops because there is no previous documented art.

The exploitation of TEK by biotech firms has led to charges of ‘biopiracy’, i.e., stealing the work of others for one’s own profit. Among the leading and most articulate critics is India-born Vandana Shiva (Shiva 1999). In response Third World countries have increasing sought to protect their biological resources. India, for example, is putting together a 30-million-page electronic encyclopedia of its traditional medical knowledge (as well as yoga positions). Ancient texts in Arabic, Bengalis and Sanskrit are being translated into five global languages - English, French, German, Japanese and Spanish - in an effort to establish ‘previous art’ and prevent others from claiming intellectual property rights (Biswas 2005). Brazil, on the other hand, is tightening enforcement of its CBD rights and has, for example, recently sentenced Marc van Roosmalen, a world-renowned primatologist, to 16 years in prison for ‘biopiracy’ (Rohter 2007). Competition for novel genetic command codes is heating up.

Natural resources take two forms - renewable and non-renewable.  Renewable include agriculture, forestry (silvaculture), fishing (aquaculture) and arguably recyclables of various forms.  Non-renewable include all forms of mining including oil.  In turn, non-renewable natural resources break out into substitutables and non-substitutables.  This last distinction, however, reflects the current state of knowledge.  Thus aluminum was arguably the plastic of its time (post-Second World War until the late 1960s) but new knowledge led to the growth of an enormous plastics industry based on the chemistry of hydrocarbons mainly derived from oil.

What is the trend - culture.  Beginning with the Agricultural Revolution when humanity stopped depending on Nature for its fruits, berries, grains and meats it has increasingly assumed responsibility to breed, rear and harvest its food.  In the 19th century humanity began to do the same with the forests - silvaculture.  In the 20th century it did the same with fish - aquaculture.  Arguably it also begun a similar process with respect to minerals - recycling,  It also has plans to replenish depleteable resources such as oil, gas and minerals by extending its grasp to other members of the solar system

3.1 Agriculture

The domestication of plant and animal 10,000 years ago marked the first enframing and enabling of a renewable resource to serve human purpose.  It provided the economic surplus required to jump start human settlement leading to civilization, i.e., living in cities, first in the so-called 'Fertile Crescent' between the Euphrates and Tigris Rivers to the Mediterranean Sea then somewhat later along the Indus River in India and the Yangtze River in China.  As will be seen below under 3.2 Fishing, a somewhat similar situation arose 7,000 years ago along the coastlines of eastern North America and western South America. 

This economic surplus permitted a division and specialization of labour with farming producing more food than farmers themselves could consume allowing others to specialize in everything from art to weapons and trade for food rather than produce it.  In most places this also led to the emergence of hierarchal societies with palaces for the king and nobles and temples for priests paid for with surplus taken from farmers effectively in the form of taxes.  Exceptions appear to include the Harappan civilization along the Indus River and the earliest cities along the coast of western South America which appear to have been much more egalitarian - no palaces, no temples, no war.  One thing all these early civilizations developed was extensive irrigation systems for farm and field.

Over time through selective cross breeding plants and animals were bred for characteristics most favourable to human needs.  In fact most of the original wild grains, cattle, sheep and lamas have either disappeared or become increasingly rare.  This development is known as the Agricultural Revolution.  A vastly greater division and specialization of labour then occurred with the surplus produced by the Industrial Revolution of the 19th century.

 While authors of the required text wax gloomily about contemporary food scarcity they note that there is no food shortage in the world today.  Rather there is a problem of distribution with some populations suffering want while others enjoy surpluses.  Unfortunately, to my mind, they fail to identify the underlying causes of this distribution problem - politics and war. 

Africa - the continent in which food scarcity is arguably the greatest - has been plagued since de-colonization beginning in the 1950s with wars and political policies that have arguably aggravated the problem.  In Saharan Africa from Morocco to Egypt governments have subsidized consumption purchasing much of staple foods on international markets and thereby undercutting domestic producers.  When subsidies are reduced, riots and political unrest reinforces the vicious circle.  The use of food subsidies to maintain domestic peace dates back at least to the Roman Revolution in the second century before the common era.  Among other things the Gracchi Brothers in 125 B.C.E. instituted a program of subsidizing imported grain to feed the plebian masses.  Julius Caesar's conquest of Egypt in the next century turned Egypt into the bread basket of the emerging Empire.  Ironically, Egypt now subsidizes grain imports from what some call the new Roman Empire - the United States - to maintain domestic peace.

In the Sudan civil war in Darfur has essentially stopped food production by black farmers facing attack from Arabic herders.  On the horn of Africa especially in Somalia there is currently a threat of major famine but political forces specifically Islamist fundamentalist militias will not allow distribution of foreign food aid with dire consequences for the population.   It should be noted that beginning in the late 1960s as the first 'green revolution' came to fruition India refused food aid and pursued a policy of self-sufficiency which has been remarkably successful.

In sub-Saharan Africa amongst the tropical rain forests and jungles war especially civil war has hampered food production as have destructive policies by governments such as Zimbabwe which have turn bread basket economies into areas of extreme food scarcity.  So-called 'bush meat' remains a critical source of human food with significant consequences for biodiversity and extinction of species.  In many cases such wars and policies represent the indirect result of European colonization.  Borders of the nation-states of Africa are not the result of indigenous forces but rather mark the limits of a colonial powers success in capturing territory.  In places like the Congo and many other countries civil war has been endemic often because borders divide people of the same tribal backgrounds.  Thus on opposite sides of a national border people often have more in common with each other than with those in their respective national capitals.  The international organizations that feed the doom and gloom of the authors with statistics cannot admit the problem because the United Nations treats existing borders as sacrosanct.  Hence the United Nations is in a sense not part of the solution but rather part of the problem.  There has in fact been only one exception - the recent emergence of Southern Sudan as an independent nation-state.  Its future, however, remains uncertain.

Politics in the developed world have also contributed to the problem of scarcity.  Traditionally these countries unlike those of Saharan Africa subsidize production rather than consumption of food.  The disproportionate political influence of rural voters has contributed to the problem.  Attempts to reduce such subsidies face political consequences that governments have been hesitant to confront.  Great hope arose, however, with formation of the World Trade Organization in 1995.  The WTO is committed to the elimination of production subsidies.  Initially, however, Article 13 (“due restraint”) of the Agriculture Agreement protected countries using subsidies from being taken to WTO tribunals where sanctions could be levied against those providing such subsidies.   This “peace clause” as it was known lapsed in 2004.   Agricultural producers in the developing world can now take offending nation-states to such tribunals.  This change in bargaining power is evident in difficulties experienced in the so-called Doha Round of WTO negotiations.  Developing countries are pressing for access to developed world food markets as bargaining chip against the developed world's pressure for access to financial markets of the developing world.

The gradual ending of agricultural subsidies in the developed world has, however, been accompanied by political responses that have arguably exasperated the situation.  In the United States and Europe the political need to keep rural constituencies happy has led to a questionable lurch into biofuels specifically ethanol.  While food production cannot be subsidized production of crops for ethanol can.  Thus a large part of the American corn crop now goes to cost ineffective ethanol production.   This has raised the price of corn and reduced the quantity available for feeding both people and livestock.  Another example is that to avoid American action at the WTO Japan has agreed to buy large quantities of American rice which it simply stores keeping it off the market.  For Japan rice production is not just an industry but also a tradition at the root of its culture.  Furthermore experience of embargos before the Second World War makes Japan concerned about giving up cost-ineffective production because of the security implications of any future embargo or other interruption in the supply of imported foods.  When a worldwide rice shortage occurred in 2005 and food riots sprang up the Japanese and Americans agreed to let the stored rice onto the market relieving the problem, 

Similarly the restrictive GMO policy of the EU has been taken to the WTO by the U.S., Canada and Australia but nonetheless has so far successfully block access to those markets.  In addition many African nations that wish to sell in the EU market are blocked because they use genetically modified seed.  All in all it is not lack of technical ability to produce food that has caused what the authors describe as 'food scarcity' but rather politics and war.

While the authors spend little time on environmental pollution caused by agriculture it is in fact one of the leading environmental problems.  Thus a wide range of contaminants reach rivers via groundwater and drainage ditches including fertilizer residues, insecticides, herbicides, pesticides and farmyard waste, all of which are potentially harmful. Milk spillage from dairies as well as cattle and pig slurry are also serious contaminants of the water system.  Among other things they contribute to eutrophication, i.e, depriving rivers and lakes of oxygen.  With respect to the earth or soil various farming activities can cause erosion of soil particles. The resulting sediment can damage fish habitat and wetlands.  Improper grazing practices in riparian, as well as upland areas, can also cause water quality degradation.  Furthermore large scale confined animal facilities rearing, e.g., chicken and pigs, can result in air pollution specifically the stench of excreta.  Cost-benefit analysis described above is used to estimate both the health and environmental costs of agricultural activity as well as cost effective control mechanisms.  These include: sediment/erosion control; confined animal facility management; nutrient or fertilizer management; pesticide management; controlled livestock grazing; and, environmentally friendly irrigation techniques.  Such management practices, however, require cooperation by farmers as well as enforcement by regulatory agencies of government.   Enforcement costs are, of course, generally external to market price and hence also need to be calculated in any cost/benefit analysis.

As will be discussed in 4.0 Ecological Economics another environmental concern is increased urbanization which draws population from rural areas (reducing the rural labour force) into growing cities.  As urban areas expand prime agricultural land is often taken out of production.  In turn, this places increased burden on less productive land which in turn raises costs.

 

3.2 Fishing

About 7,000 years ago along the east coast of North America from the Carolinas to Ungava an advance seafaring culture developed relying on fishing as the source of economic surplus.  Megalithic sites were built in New England and elsewhere along the coast.  Formally known as the Maritime Archaic, the Mystery of the Lost Red Paint People (see Link below) includes the conjecture that they may have crossed the Atlantic following the Gulf Stream and taught Europeans how to build megalithic structures.  A similar settlement pattern developed along the west coast of South America shortly after.  These, however, appear to have combined sea resources and agriculture.  And, of course, along the west coast of North America an advanced seafaring culture developed in places like British Columbia where the Europeans discovered sizeable settlements in the 1700's of the common era. 

Unlike land-based agriculture the oceans are a commons in which private ownership is difficult to establish.  When John Cabot discovered the Grand Banks off Newfoundland in 1497 his crew simply used buckets to land the fish because they were so plentiful.  In short order other European nations began to exploit the resource as they continue to do to this day.  Ocean fish in terms of the authors of the required text are thus an 'open access resource'.   Given such resources belong to everyone yet to no one, i.e., they are ‘public goods’, competitive self-interest dictates getting for oneself as much as possible as quickly as possible with no consideration for others – past, present or future.  While biological science can estimate optimum harvesting practices for different species - timing, permitted quotas and size of fish, to maintain such resources over time - sustainability - government must act because there is simply no private incentive to do so.  Three generic approaches have been developed: Property Rights; Regulation; and Fiscal Policy.

Property Rights

By government fiat private property rights in the fisheries can be established.  Four examples demonstrate.  First, aquaculture - fish farming - involves penning and rearing certain species in private water estates licensed by government.  In fact over the last three or four decades aquaculture has become a major source of those species that can thrive under such conditions.  The text documents the benefits and the costs of such practices.  Second, based on scientific evidence government establishes the maximum quantity of a species that may be captured in a given timeframe and then allocates individual transferable quotas to fishers.  Such quotas may initially be auctioned off and are marketable to other fishers meaning that those who are most cost-efficient can afford to buy up quotas from those who are not.  This eliminates inefficient fishers rationalizing the industry and making it easier for government to regulate (see below).  The text again documents benefits and costs of such transferable quotas.  Third, government may establish the maximum quantity of a given species that can be captured and then allocate catch shares to fishers - individual or collectives - based on historical records.   In some cases such shares may be marketed again allowing the most cost-efficient fishers to buy quotas from the less profitable reducing the costs of regulation.  Finally, through the Law of the Seas Convention, nation-states have agreed to recognize a 200 mile management zone beyond their internationally recognized three mile maritime territorial limit.  Within these zones a nation-state effectively exercises ownership of maritime resources including fish as well as mineral resources such as oil.  Nation-states then use their coast guard and naval military forces to exclude fishers from other countries.  Where such zones overlap bilateral agreements between countries are usually ratified permitting cross exploitation or defining rights and obligations of both parties.  Within such zones individual transferable quotas and catch shares can then be introduced.

Regulation

Government regulation of the fisheries takes on at least three forms.  First, government may limit the technologies that can legally be used to harvest fish species.  Such limitations are intended to keep catches at levels that will allow a fishery to remain sustainable.  The text documents a number of such limitations including their benefits and costs. Second, government often imposes closure in space & time to protect species during critical phases of their reproductive cycle.  Thus certain areas at certain times may be closed to fishing.  Third, government may establish marine protected areas and reserves in which no fishing is ever permitted.  This is intended to allow species to have a secure habitat to breed and from which they emerge to renew fish stocks in areas open to fishing.  

Fiscal Policy

Fiscal policy involves tax and spend decisions of governments.  With respect to taxes, these can be used to raise the costs of fishers in order to limit their numbers and thereby foster sustainability of a fishery.  Such taxes can also be used to pay for regulation and enforcement costs.  With respect to spending government can offer buyback and decommissioning subsidies to purchase vessels from fishers and decommissioning vessels taking them out of service and thereby reducing the number of participants in a fishery.  Arguably the most significant spending decision of government involves enforcement costs.  Whether it is establishing property rights, regulating technology and/or fisheries themselves or collecting taxes or paying subsidies without market discipline government must pay the costs of enforcing its policies to maintain sustainable fisheries.

As in Agriculture, however, government imposed property rights, regulations and fiscal policy are subject to political pressure by a relatively small but often powerful constituency made up of fishers, fishing communities and the commercial fishing industry.  Such political forces continue to limit the implementation and enforcement of 'scientifically' or 'environmentally' sound practices in many countries and internationally - the case of the Atlantic blue tuna is a recent example.

 

3.3 Forestry

Unlike fishing, forests are not a commons but rather either private property or publicly owned property, i.e., on Crown lands.  In both cases, silvaculture can be practiced, i.e., planting, nurturing and harvesting tress as a crop.   Silvaculture is arguably best practiced in the Nordic countries - Norway, Sweden and Finland.  For many generations their forests have been sustained.  Driving from Stockholm Airport into the city, for example, one passes through a third generation forest of 100 year old trees.  As in fishing the biological sciences can be used to estimate optimum harvesting schedules and practices to maintain sustainable forests.

Forests generate both market and non-market benefits.  Market benefits include treating trees (as well as other flora and fauna) as saleable commodities subject to many stages of value added and as a capital asset that, within limits, grows in value each passing year. This includes the potential commercial value of the diverse genetic materials supported by 'natural' forests, especially in tropic regions.  Hence bioprospecting is an important emerging industry placing market value on forests and their related ecosystems.   Internationally, property rights for such genetic material have been assigned to nation-states under the 1992  UN Convention on Biodiversity In addition, forest lands often have alternative market uses for agricultural, industrial or residential purposes.  This, of course, means forests have an opportunity cost, i.e., a next best alternative use.

 Non-market or external benefits include environmental services not captured by market price.  These include: preserving watersheds; preventing soil erosion; protecting habitat thereby maintaining biodiversity; carbon capture; and, as an environmental amenity.  Furthermore, many tropical countries forests or rather jungles support indigenous peoples - Fourth World peoples - with cultures dating back to pre-history.  If protecting biodiversity is important, is not protecting the cultural diversity supported by the same forests?  Theoretically, at least, the dollar value of such environmental and cultural services can be estimated and used in cost-benefit analysis to determine the true social opportunity cost of alternative uses.

While the biological sciences can provide guidance to optimize the social benefit of forests, i.e., maximum net public benefit, there are perverse incentives, both natural and governmental, that can and do inhibit its achievement.  Natural incentives include such things as the high present value of existing over future forests, the potential for forest fires, air pollution and insect infestations.  These encourage private owners to harvest sooner and more intensively than would maximize net public benefits.  It also encourages private owners to plant fast growing species often in plantations to minimize harvesting costs without accounting for environmental benefits of a diverse forests ecosystem.  

Governmental incentives can have the same perverse effects.  More favourable taxation of agricultural, industrial and residential use of forest lands is one factor.   Concession agreements on public lands are often limited in time encouraging rapid exploitation of the resource with little if any concern for long term benefits that can not be captured by firms at market price.  Similarly, stumpage fees or the charge placed by government on harvesting public lands can fail to capture all non-market benefits and costs.  This is, for example, one argument used by the United States to place tariffs on Canadian softwood lumber products.  Furthermore while public ownership provides a vehicle to capture the long-term benefits of the forests as in agriculture and fishing government remains subject to political pressure by a relatively small but often powerful constituency made up of loggers, logging communities and the commercial timber industry.  Such political forces continue to limit implementation and enforcement of 'scientifically' or 'environmentally' sound practices in many countries and internationally.

Consumer behaviour can create market forces that recognize the non-market benefits of forests.  These include boycotts of products made by offending firms and certification of products made by eco-conscious ones.   The result, of course, is higher prices on the market and the willingness to pay of consumers becomes the issue.  Action by non-profit organizations can also help including so-called 'debt-nature' swaps.  The authors praise such efforts but fail to consider the source of much Third World debt.  In many cases this debt was incurred to buy military equipment to fight the many wars outlined above under 3.1 Agriculture as well as the failure to invest wisely, often due to corruption of local officials. 

 

3.4 Mining

By mining I mean purely extractive industries, i.e., those that take deposits out of the ground with no possibility of renewal or replacement, at least on Planet Earth.   Put another way, they are non-living resources for which 'culture' is simply not possible as with agriculture, aquaculture and silvaculture.  They include mineral deposits such as aluminum (bauxite), copper, gold and silver as well as coal, natural gas and oil.  One way of characterizing supply is provided by the U.S. Bureau of Mines and Geological Survey.  Another used by your authors in the 9th edition is:

Current Reserves: deposits that can be profitably extracted at current market prices;

Potential Reserves: deposits available depending on future prices or extraction costs generally caused by new technology; and

Natural Endowment: their total geological presence in the planet, some of which is unlikely to ever become available at any foreseeable price.

Supply can increase over time depending on what in traditional mining is generally called prospecting and in the oil and gas industries, exploration.  The costs of exploration and extraction are also dependent upon technological progress.  Thus remote sensing technologies using satellites in earth orbit have significantly reduced exploration costs.  Among other things such satellites can identify types of vegetation associated with specific mineral deposits.  Satellites can also use different parts of the electromagnetic spectrum to detect likely deposits as well as employ active systems such as radar to penetrate below the surface to identify geological formation associated with different types of minerals as well as oil and natural gas.  Similar surface technologies are employed.  Elaborate 3D graphic models and visualization technologies can then be applied to test drilling and remote sensing data.

The question becomes the optimum social rate of extraction which in turn invokes the question of present value and the discount rate, i.e., how much do we value future benefits and costs?   As suggested by Bain, in economics conservation does not mean non-use or deferment but rather “wise use”.  Conservation involves choice among of alternative techniques of exploitation as well as the time pattern of production, investments and other costs to yield an optimal net social benefit relative to the “time preference” of society.  Conservation performance is poor to the extent:

1. Exploitation raises both present and future costs above the obtainable minimum while reducing or not increasing the amount ultimately recovered;

2. Rapid or intensive current use results in impairing (or eliminating) future use not compensated by current additions to output;

3. Minimizing costs or investments in the use and development of a resources that curtails future use or raises future costs disproportionately; and,

4. Stupidity (Bain 1968, 425-427)

And, of course, there can be significant environmental costs associated with extractive industries.  Tailing ponds at the oil sands and their effect on migratory birds is one example.  During 2010 in Hungary a tailing pond burst and threatened  to pollute the Danube River.  Furthermore the aesthetics of natural areas are destroyed by open pit mining of various types.  Increasingly firms are required by governments to return such sites to their 'natural' state after exhausting the resource.  Such aesthetic pollution, for example, caused, in my understanding, INCO in Sudbury to invest heavily in a special type of grass to cover its slag heaps.  Problems associated with 'fracking' shale deposits to release natural gas is another example of potential environmental costs this time to a watershed.  As with pollution above 2.0 Environmental Economics, government has a significant role in forcing firms to internalize such costs through taxes, regulation or fines.

 

3.5 Recyclables: One Man's Garbage is Another Man's Treasure

Recycling is a classic example of knowledge being required to recognize an environmental feature as a toolable natural resource suitable to serve human purpose.  Since the beginning of civilization (living in cities) there have been garbage pickers, rag merchants and others making their living cleaning up the waste of others - One Man's Garbage is Another Man's Treasure.  In Victorian England there was an entire class of people who lived by going under the paved rivers of London (like Fleet Street built over the Fleet River) when the tide went out to collect the coins, rings, jewels and other expensive things dropped by the walking and riding rich above.  In much of the Third World today recycling is arguably more efficient than in the developed world.  With so many poor - cheap labour - garbage picking is a way of life for millions of people.   There are, of course, medical and other human costs associated with such employment.

In the developed world a formal market must exist for recycling to become a viable economic endeavour.  In general the smaller number of poor are legally prohibited from garbage picking of landfills and city dumps, i.e., sorting and collecting recyclables.  There must be a supply and a demand.  With respect to the supply of recyclable materials, civilization - a concentrated urban population - is required. With respect to demand there has to be the expectation of profit.

Supply

If consumers do not bare the cost of disposal and receive no reward for recycling then everything simply gets trashed; i.e., no at-source sorting or collecting.   Traditional municipal garbage collection works in this manner.  Pay your taxes and everything is picked up and then dumped in a landfill of one sort or another.  As population grows, however, both the quantity of trash and the cost of landfills grows.  Suitable nearby sites become fewer as existing ones are filled requiring new sites further away from the population centre raising transport and other costs, e.g., negotiating disposal contracts with neighbouring communities.  General taxes can be raised or, alternatively, user taxes based on volume can be imposed.  Tax increases, however, generally face voter resistance and politicians look for alternatives because, one way or another, all social costs must be paid.

Recycling is one alternative.  Its economic success depends, however, on the concentration and purity of recyclables.  One step is providing households with voluntary recycling dumpster bins promoting at-source sorting and collecting.  The incentive, however, is social responsibility, not economic.  Refundable deposits - for example, on bottles, batteries, e-waste and tires - paid initially by the consumer as a disposal charge on the purchase price acts as an economic incentive to sort, collect and deliver recyclables to collection centres.  By contrast, if only a surcharge is imposed with no refund then the consumer has no incentive to bring recyclables to such centres.

Demand

Market demand must exist for processing at a cost and selling price that sustains the market.  Collection without processing just adds to landfills.  The economic viability of recycling depends on the cost of virgin materials and possible substitutes as well as technological change affecting both discovery costs of new virgin material and recycling costs.  As initial sources of virginal material are exhausted exploration and discovery costs must be paid to find new ones.  In addition, often the most profitable sources are generally exploited first meaning rising costs of extracting from the next best source.   At some point the cost of recycling becomes cost-effective to an industry relative to secondary and tertiary sources of virgin materials.  When rising costs of virgin ore are combined with waste disposal incentives for recycling, consumers may find recyclable goods cheaper to buy and producers find they are cheaper to produce - a virtuous circle that your authors call the composition of demand effect.

Recycling, however, is costly.   Collection and separation are labour intensive.  To the degree households begin the collection and separation process such costs are reduced to firms (but nonetheless borne by households).  Transporting collected materials to reprocessing plants can be high because they are often located close to the source of virgin materials rather than population centres.  In addition there are energy costs of reprocessing as well as costs associated with meeting regulated pollution standards.

While recycling is promoted by resource scarcity this, in turn, encourages firms to increase exploration and discovery activities in search of new virgin material sources as well as for cheaper substitute inputs.  As noted above 3.4 Mining technological change including remote sensing technologies are lowering exploration and discovery cost for many minerals.  Similarly the search for substitutes, for example carbon fiber for aluminum, can also reduce the economic viability of recycling.  However, as long as the marginal cost of recycling is less that the alternatives it effectively extends the supply of scarce materials.

In fact, the demand for recyclables begins at home - both the household and firm.  Thus firms have what the authors call 'new scrap' that falls on the production plant floor.   One reason why the U.S. failed to ratify the Kyoto Agreement was apparently the poor 'new scrap' practices of American firms relative to their European and Asian rivals.  In the U.S. with its traditional abundance of raw materials such recycling practices were slow to be adopted compared to their resource poor rivals.  With respect to 'old scrape', i.e., embodied in discarded products, producer do not generally bear disposal cost biasing them towards virgin materials.

There are also market failures or imperfections that reduce demand for recycled materials.  Efficient recycling depends on the marginal disposal cost, e.g., the cost of landfills and alternatives.  If municipalities fail to charge enough in taxes to cover all social costs of dumping then reducing waste, reusing products and recycling are discouraged.  Senior levels of government can also fail to charge sufficient royalty fees on mining public lands effectively creating a subsidy for the extraction of virgin materials thereby reducing their cost and recycling incentives.  This is similar to the problem of low stumpage fees with respect to 3.3 Forestry.

To the degree firms do not pay all social costs associated with their activities then government can step in to force them to internalize such costs in market price.  Thus selected taxes may be levied on virgin materials and subsidies offered for recycling things such as waste oil.  Government can also subsidize the purchase of public and private recycling plants and equipment reducing the market price of recyclables.  Similarly government may impose the take-back principle forcing producers to take back their products after their working life has ended.  The government through such measures attempts, in effect, to establish an efficient balance between consumption of new and recycled materials.  Ideally when recycling is cost-effective it leads producers through product design to facilitate recycling and consumers to prefer recycled products and packaging.

Reduce, Reuse, Recycle

 

3.6 Links

Biswas, S., “India hits back in 'bio-piracy' battle”, BBC Online, December 7, 2005.

Dooley, P.C., The Labour Theory of Value: Economics or Ethics?, Discussion Paper 2002-2. September 2002,

                  ISSN O831-439X, Department of Economics, University of Saskatchewan.

Loasby, B. J., Options and Evolution, DRUID Summer Conference 2002.

Polanyi, M., The Republic of Science: Its Political and Economic Theory, Minerva, Volume 1, 1962, 54-74.

Rohter, L., As Brazil Defends Its Bounty, Rules Ensnare Scientists", NYT, August 28, 2007.

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