Scarcity and value

I’ve been thinking about the exchange with my brother. I said, “natural resources are NOT constrained… basically, we humans are only constrained by our creative use of resources.”

This seems right, but it does ignore the fact that prices for a good are set in markets where the players are weighing the relative scarcity of the good. For me to sell my widget to you for $10 dollars implies that for widgets to become more scarce to me costs less than $10 and its worth more than $10 for you for widgets to become less scarce to you.

My point is that natural resources are often thought as given, i.e. thought of in terms of absolute scarcity, but are in fact better thought of in terms relative to their use by individuals. Markets are a great mechanism for individuals to communicate their respective outlooks on a resource’s scarcity. The market for land is a perfect example. It’s obvious that there is a fixed amount of land, but the real estate market reflects the fact that different people in different circumstances have different assessments of its scarcity. If I own a plot of land in a prime spot on the bank of a major river that I use for low grade farming (let’s say raising sheep) and a company can use that land to build a high production factory, they’re going to see the land as more valuable (i.e. more scarce) than me… I can raise sheep anywhere, but they need the river to ship their goods. The market allows me to interact with the company and to set a price.

Paul Seabright in The Company of Strangers sees water as a commodity that should be bought and sold in markets:

There is no serious alternative to treating water as an economic commodity. It is scarce in many locales even if it is not globally scarce, and its local scarcity may eventually prove globally threatening [i.e. “water wars“]. But calling it an economic commodity begins rather than ends the argument. What would it mean to treat it as such? First, water’s scarcity requires users to be given incentives to use it efficiently. These need not always be price incentives, but we know that price incentives often have desirable features that other kinds do not. in particular, they make possible the decentralization of decisions, when we lack the detailed knowledge and mutual trust required for direct regulation or moral persuasion. The great merit of charging a price for water is that we no longer need to argue who deserves it more: if people are poor they may deserve our help, but if water can be priced to reflect its scarcity relative to other goods, we no longer need to argue the case for helping them separately when we consider food, housing, water, clothes, and all the other aspects of their lives. Proper pricing strengthens rather than weakens the case for helping the poor…

Likewise, markets in emissions of pollutants would have a similar effect. Price incentives would give polluters an incentive to be more efficient.


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