Resource Depletion and the Market Mechanism

Abstract

Resource use is determined largely by the market mechanism. Economists have stressed the role of markets in allocating and adapting to resource scarcity — the various mechanisms were discussed in Chapter 2. However, the question arises as to whether markets provide sufficient incentive to conservation — or, alternatively, as some critics (for example Kay and Mirrlees, 1975) allege, too much. It is a standard piece of economic theory that a perfect market mechanism guides the economy to a social optimum in which the ‘best’ combination of goods is produced according to the most efficient processes: no one can be made better off without at least one individual becoming worse off. The conservationist critique of resource use implies misallocation and this must be attributable to some form of market failure. Both to assess this critique and to devise appropriate remedies it is useful to identify specific sources of market failure.