1. Market Failures in Natural Resource
Management
• Natural resource and environment are
particularly prone to market failure
• Market in other words, often fail to
allocate natural in environmental
resources efficiently.
F:Gouraha A.KPowerpoint studyMarket Failures in Natural Resource Management
2. A Simple Taxonomy of Market failure
―Property rights are not complete
―Institutions define the working rules by which
market operate
―Market failure thus can result from Inst.
Failure
Reasons for failure
1. Bio-physical characteristics of NR & E.
Process Co2 pollution global warming
3. Control-difficult – Public goods
Market never work perfectly
2. Times have changed but the institution have hot
Technology change
Population grows
Market forces spread
Control to pollution
3. Govt. policies establish wrong institutions
Zamidar – Panchayat
A policy failures occurs when a govt. policy
causes the market to set prices that do not reflect the
relative scarcity of the priced goods.
4. Implications of Market Failures
―Diverge from the conditions of
competitive market
―Prices do not affect relative scarcity &
consumer preferences for goods & services
―Over exploited
(efficient sustainable and equitable NR
use)
5. 3. Types of market failures
(a)Market concentration (few or one byer and
seller)
Monopoly – monopsony, oligopoly
Exp. Petroleum, minerals
Monopoly – sandal market
(b) In complete Property rights
(not completely specified, not exclusive not
preferable or not enforced
(Fig. 8.1 and 8.2)
6. 3 B.1 Non transferable property rights.
Agril. Land – distributed to poor's
(Not sell not leased out others)
3.B 2. Public goods- non rival, non exclusive benefits of
bio-diversity.
3.b.3. externalities
3.c. Liquidity constraints – large investments
- Benefit distributed
- Teak plantation, Tree farming
Irrigation canals
Credit-?
CPRS. ?
7. 3 d. Transaction cost
Cost of collecting rents is high
Polluting factors, small, large
CPRs- Management –cost high
Than its open access
3 e. Incomplete information, risk &
uncertainty
8. - Biophysical as properties – growth rate,
survival, tolerance to shock
- Their Market conditions
- Biodiversity & climate protection –
uncertainty-eucaplyptus
Price- Uncertainty lay term trees
4. Market failures in conservation: A summary
Productivity investment – a afforest ion
farming, irrigation, fertility management
Conservation investments – forest protection
9. Table 8.1. Level and schedule of costs and returns of investments in
production and conservation
Costs Returns
Investment Level Schedule Level Schedule
Production
Irrigation High Up front High Immediate,
constant
Increase fertility medium Up front, continuous medium Immediate,
continuous
Trees medium constant Medium to high delayed
Conservation
Drainage high Up front, continuous high Delayed
Tank maintenance High Up front, continuous High Uncertain
Soil conservation Medium Up front Medium Mainly delayed
Forest protection Low Constant High
Fire protection Medium Up front, constant Uncertain
Flood protection high Up front, rising uncertain
10. 5. Policies that distort market of natural
resource (policy failures)
(a)Misdirected policies
- Reduced deforestation –law- laws against
cutting & marketing of trees
- Canal –water –overutilization –cost low
(b) Policies with environmental side effects –
subsides –timber
Sugarcane- Maharashtra ground water affected
Subsidies –efficiency –fertilizer pesticides
11. 6. The spiral of NR degradation and increase
poverty
a. Productivity – overutilization – short term
programme
b. B. equity –deforestation – less time taking
c. Sustainability- completing the vicious circle
7. Correcting market failures in NR management
a. Matching the policy with problem
1. Changing institutions to correct market failures
– sukhomajry – canal water - WUA
2. Examples of matching the policy with the
problem –deforestation- subsidies
12. 7. b. Constraints to correcting market failures
a. Policy analysis capacity may be unavailable
- Shortage of trained people.
b. Policies may be difficult to implement
Ground water – marketing them
c. Official may resist implementing new policy
Ex. Joint forest management
d. Vested interests can block policy reform
Licencing, plicies, forest based industries ,
NTFPs- monopoly
13. Table 8.2. Types of market failures and potential policy
tools
Types of market failure Impact Policy tools
Market concentration High price; low demand
and underuse
Facilitate market entry; regulation
Transaction costs No market Technical change; user coupons
Incomplete information
and risk
Underinvestment Insurance; more information
Incomplete property
rights
Lower expected returns
to investment; incentive
to exploit sooner
Strengthen property rights
institutions on both private and
common land
Public (nonrival) goods underinvestment Government provision
Negative externalities overinvestment Taxation; regulation; property rights;
marketable permits
Positive externalities Underinvestment Subsidy; property rights
Liquidity constraints Underinvestment in
indivisible technologies More open credit markets
