Freeman

ARTICLE

The Market and Scarce Resources

AUGUST 01, 1984 by JOSEPH S. FULDA

Joseph Fulda is Assistant Professor of Computer Science at Hofstra University.

One of the most recurring canards levelled against the market is that it promotes the ravaging of our natural resources by profit-hungry businessmen, fails to urge conservation in the face of scarcity, creates pollution, and otherwise disfigures the natural environment. Nothing could be further from the truth. As a resource becomes scarcer and scarcer, its price rises in lockstep, thus assuring that wary consumers will conserve. Furthermore, the higher the price the more incentive a businessman has to try to produce more, and produce he will. Finally, alter natives to the resource, once too expensive, are now cheap by comparison. And, as Julian Simon points out in The Ultimate Resource, the human mind can always find an alternative which satisfies the same basic need as does a given resource.

When the resource is used in industry, not only is conservation promoted, but only those producers who can use the resource most efficiently will obtain it. Even after paying the price that scarcity has determined, they must still be able to turn a profit—no mean feat.

As for pollution and disfiguration of the natural environment, these are costs of the production process. But provided third-party effects are adequately remedied, they will be tolerated only so long as the consumer believes that the cost of pollution is worth bearing in light of the products he is to receive. The moment people generally believe that what is being produced is not worth the costs to the environment, they will cease paying the premium that those goods must of necessity include in their price to compensate the third parties whose properties are directly damaged by the production process.

Best of all, the pricing system works automatically, responding to even slight diminutions in the supply and to even slight changes in consumer preferences. The alternative to the market method of dealing with scarce natural resources is a system of allocation and rationing together with protective regulations which can never hope to match the discrimination and immediacy of the pricing system.

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August 1984

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Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.
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