Money Talks: Pricing Inefficiently-Managed Natural Resources to Convey the Right Signals

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157 Hosler Building
Prices, which reflect the marginal value of a good or service, provide signals about scarcity and efficiency. A larger price generally signals greater scarcity.  Signals about efficiency are related to marginal benefit and marginal cost tradeoffs.  For instance, production is inefficiently low when a good’s price exceeds the marginal social cost of production, where these costs are society’s foregone benefits from pursuing the best alternative.  The social prices of in situ natural resource stocks are not determined in markets.  Natural resource stocks are natural capital assets (or liabilities), and therefore contribute to a society’s wealth just like any other capital asset. The right price of a resource stock will provide an accurate signal of wealth changes from conservation or exploitation, while also conveying the right signal about resource management efficiency.  The two primary approaches for pricing a resource stock are (i) efficiency pricing and (ii) regime-specific pricing.  An efficiency price equals the marginal value of a current stock assuming current and future resource management is efficient. A regime-specific price is the marginal value of a current resource stock under a particular, inefficient regime, assuming the regime will continue indefinitely. Inefficient regimes are much more likely. In this paper, we argue that regime-specific prices do not reflect the social opportunity cost of current resource use.  We derive and operationalize a third pricing option—social-cost pricing—that accounts for the social opportunity costs of current resource use, regardless of whether current usage is efficient.  Our results show that social-cost prices have desirable properties that regime-specific prices do not always share. A numerical example of the Gulf of Mexico reef fishery complex indicates there may be significant differences in the magnitudes of efficient prices, social-cost prices, and regime-specific prices.