Uncertainty in the Theory of Renewable Resource Markets

Abstract

The natural growth rate of most renewable resource stocks is in part stochastic. This paper examines the implications of such ecological uncertainty for competitive equilibrium in a market with property rights. We show that stochastic fluctuations add a risk premium to the rate of return required to keep a unit of stock in situ, and we examine the effects of fluctuations on resource rent. Examples are used to show that extraction can increase, decrease, or be left unchanged as the variance of the fluctuations increases, depending on the extent of market self-correction. Regulatory implications are also discussed. Renewable resource economics has traditionally been concerned with the study of dynamically optimal harvesting policies given a deterministic function for the natural growth of the resource stock. Issues have included the existence and characteristics of steady-state equilibria for the optimally managed resource, the need for and design of regulatory policies to prevent over-exploitation, and conditions under which (as a social optimum or otherwise) the resource will be exploited to extinction.1 Much of this work has been based on the assumption of a fixed and exogenous price for the harvested resource (typically resulting in bang-bang solutions for the harvesting policy). However some recent papers make price endogenous, and thereby describe how the extraction rate, and the rate of return and asset value of the resource behave in a competitive market with property rights.2