Wednesday, October 27, 2010

Environmental Economics : Pricing

The role of technology is really important in policymaking and regulations. Natural resources are not priced purely based on scarcity. The price is based on the cost of extracting that resource, and the rate that it can be extracted. Although the resource is always just being depleted, the price does not necessarily have to go up. It may take more “effort” to extract the resource as it gets depleted, but the effort is not necessarily translated to having a higher cost because of new technology. One example is the overfishing of tuna. Although tuna populations have dropped substantially, tuna prices have not gone up enough to decrease consumption substantially because of technology that makes it easy for fishermen to find and catch the athletic fish. Yes, it does require more effort to catch the tuna now compared to before, but it is not more expensive.

This effect is also present in the petroleum industry. Most environmentalists were hoping that as oil gets depleted and it becomes more and more technically difficult to extract, it will become so expensive that we'll have to move to clean technology. However, because there have been so many technological developments, we are not rate limited or production cost limited. Deep water oil rigs are serious engineering productions, but the amount of oil in the deep waters is considerable. Then instead of substituting oil with clean energy, we might keep using oil and even more frustratingly, continue to engineer cheaper ways to extract it instead of just giving it up and working entirely on clean energy instead.

The only thing that is really expensive with these rigs is the cost of a major mishap such as the Gulf Oil Spill. As it becomes more and more risky, the engineering may become more and more risky, which will ultimately make it more expensive. Even so, the cost to the environment is often greater than the monetary cost to humans. Nature cannot be paid off.

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