Oligopoly, the Environment and Natural Resources

Luca Lambertini

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781134613625
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Industrial production and consumption patterns rely heavily on the intensive use of both renewable and non-renewable resources and the consequences for the environment can be serious. Following a long period of time where the profit incentives of firms have prevailed over preservation of the environment and the world's natural resources, a new consensus has emerged concerning the need to regulate firm behaviour, aimed at ensuring the sustainability of the economic system in the long run.

This book offers an exhaustive overview of current economic debate about these topics, taking modern oligopoly theory as a benchmark. The first part of the book covers static models dealing with incentives for green research and development, Pigovian taxation, cartels, environmental quality and international trade, as well as the role of corporate social responsibility, public firms and consumer environmental awareness as endogenous regulatory instruments.

Then, the author moves on to examine the role of time while drawing from optimal control and differential game theory. This opens the way to the discussion of fair discount rates to ensure the welfare of future generations, as well as the long run sustainability of production and consumption patterns.

1 Introduction

A tragedy of commons

This chapter outlines some key concepts and results of the early stages of environmental and resource economics, which constitute the benchmark that will accompany us for much of the rest of the book. The problem we are looking at is twofold: the amount of polluting emissions caused by production and consumption, and the pressure put on renewable and non-renewable natural resources by the worldwide demand for inputs, raw materials, energy sources, services and consumption goods that has been steadily growing over the last 250 years, leading us to face now the prospect of leaving, as a bequest to future generations, a world which is deprived of resources and fatally polluted, instead of one in which an economy based on brown fossil fuels has been replaced by an equally (if not more) productive system based on green renewables.

I will start with a short list of figures concerning the expected duration of major fossil fuels and some other non-renewable mineral resources (and how the related estimates have changed over the last quarter of a century or so), accompanied by other data describing the increase in CO₂-equivalent emissions attributed to anthropogenic activities, and the associated global warming effect (although, as stated in the Preface, I’m not scientifically qualified to give a definitive judgement on the connection between the two – but I still am entitled to have and express my personal view, which I am about to spell out).

The four cornerstones of the exposition to follow will be the so-called tragedy of commons, the Coase theorem, the dynamics of resource extraction and the Hotelling rule, and finally the issue of determining the optimal number of firms in the commons. Except for the last, these will rely on the simplifying assumption of either monopoly or perfect competition. To begin with, I will cross the boundaries of my specific area of competence and interest (which is theory and its policy implications) to give you a rough map of the territory we are about to walk over in terms of stylised facts and descriptive data.

1.1 A few facts and figures

As I have already stated in the Preface, I am very far from being an expert in climate change and global warming, but a brief overview of the gloomy situation looming ahead of us is called for in introducing the themes we are about to examine in the remainder of a book on firms’ incentives and policy measures with respect to the preservation of the environment and natural resources. In addition, this brief outline will help the reader appreciate the intrinsic drawbacks and limitations of the purely economic approach adopted here.

The scientific community as a whole (with a few exceptions, of course) shares the view that the sharp increase in greenhouse gas (GHG) emissions over the last decades is mainly because of energy use by the growing set of rich countries (at the moment China is the leading contributor to global CO₂-equivalent emissions, ahead of the US and the EU(25)).¹ In 2000 it was reported that energy use was responsible for a volume of emissions amounting to almost 25 megatons per year of CO₂-equivalent out of total GHG emissions equal to more than 41 megatons per year. This has brought about an increase of approximately 1°C in the average surface temperature of the planet from 1850 to 2000, with a sharp increase over the last 50 years or so.² The possibility of exceeding fatal thresholds of temperature increase – with catastrophic consequences is also being taken into consideration (see United Nations, 2009; Stern, 2009).³ The likelihood of taking this no-return route is strengthened by forecasts about the future demand for fuels – should the global economy recover from the current crisis and start growing again.⁴

The twin issues of the exhaustion of fossil resources, as well as estimating its expected date, have been permanently at the top of the agenda of the scientific community for a long time. A brief comparative assessment of residual economically exploitable stocks of a few non-renewable resources over an almost 40-year time span is a useful exercise. Table 1.1 reports estimates of the expected residual duration of fossil fuels and metal ores on the eve of the first oil crisis in the early 1970s. T ^e is known as the exponential index (Meadows et al., 1972).

Table 1.1 Expected duration of non-renewables, 1972

Resource	T^e
Oil	20
Natural gas	22
Coal	111
Iron	93
Copper	21
Lead	21

Source: Meadows et al. (1972).

According to Table 1.1, oil, copper and lead should have been completely depleted well before the year 2000. Now look at Table 1.2, reporting the values of T^e computed for the same set of resources in 2008. Oil reserves are expected to last for another 42 years, while the expected duration of copper and lead ores as of 2004 are more or less comparable to the estimated value in Table 1.1.

Table 1.2 Expected duration of non-renewables, 2008

Resource	T^e
Oil	42
Natural gas	60
Coal	133
Iron	72
Copper	35
Lead	22

Sources: BP tatistical Review of World Energy (2008), www.bp.com/statisticalreview; International Energy Outlook (2011), http://www.eia.gov/forecasts/ieo/.

Of course, this kind of discrepancy can be given a sound explanation on several grounds, for instance because new large and economically convenient deposits have ...