"Free" Resources
Economists assert that we live in a world of scarcity. We
have limited resources, and the cost of using them in one
way is that we cannot use them in some other way. There are
a few exceptions. Salt water is so abundant in the middle of
the ocean that all uses of it can readily be met. Ice in
Greenland is not scarce. Air is our most important free
resource. Because we all get as much air as we want to
breathe, air is not normally a scarce resource but a free
one.
Sometimes resources appear to be free when they are in
fact scarce. When scarce resources appear to be free, people
do not take into account some effect that their actions have
on other people. Because some part of the effect of their
actions is "external" to the decision-maker, these cases are
called externalities. Externalities can be
positive, which means that there are by-products to a
decision that benefit others; or they can be
negative, which means that there are by-products that
harm others. Public goods are an example of positive
externality. The problems of the commons and pollution are
examples of negative externalities. Because decisions
involving externalities are based on faulty calculations of
the complete costs and benefits, they generally are
economically inefficient.
Two efficiency problems arise when scarce resources
appear to be free. The first is that less may be produced
than could be produced with a different pattern of resources
use. The economy will, as a result, produce at a point
inside of its production-possibilities frontier. The problem
of the commons can have this result.
For example, consider Fantastic Fishing Grounds, which
are open to all. Suppose that the table below shows how the
"production" of fish depends on the number of fishing boats
using Fantastic Fishing Grounds. If a boat goes to other
areas where no one else is fishing, it can "produce" 20 tons
of fish. John Smith is a boat owner, and he must decide
whether or not to go to Fantastic Fishing Grounds. If there
are already seven boats there, he will find that it is in
his interests to go there, too. His choice is between a
catch of 20 tons elsewhere or 33 tons at Fantastic Fishing
Grounds. But from the point of view of society, this is a
poor decision. Adding the eighth boat to Fantastic Fishing
Grounds adds only twelve tons of fish to the total catch,
whereas sending the boat elsewhere would add 20. The
decision to go to Fantastic Fishing Grounds looks good to
John Smith because he does not take into account the lost
"production" that his decision causes other fishing
boats.
The Fantastic Fishing
Grounds
|
# of Boats
|
Total Catch
|
Average Catch
|
Marginal Catch
|
5
|
200 tons
|
40 tons
|
--
|
6
|
228
|
38
|
28 tons
|
7
|
252
|
36
|
14
|
8
|
264
|
33
|
12
|
9
|
270
|
30
|
6
|
Next we look at a second
efficiency problem that arises with scarce resources
that are perceived to be free.
Copyright
Robert Schenk
|