Thermodynamic and Economic Concepts as Related to Resource-Use Policies

Issues related to the optimal use of exhaustible natural resources have for some time enjoyed a relatively peaceful existence in the economics literature. In a competitive market, the role of prices which reflect the scarcity value, opportunity cost or user cost of scarce resources in guiding a socially optimal intertemporal pattern of depletion was firmly established, and distortions in this pattern that result from government interference and/or imperfect markets were noted. The calm of this debate has been shattered, however, with the seemingly abrupt nearness of energy exhaustion and widespread public concern with the question of how exhaustible resources are to be managed. Within this (now) public arena, the essence of the economics position in terms of policies for guiding the use of exhaustible energy resources is expressed by MacAvoy as follows: There is no substitute for rising prices because as prices increase, you get more [energy resource] conservation [and] reduce demand ... Any approach that centers on energy alone, thereby reducing substitution, will end up wasting some kind of resource (Roche 1979, p. 1). MacAvoy's statements reflect the well-known notion from received economic theory related to exhaustible resources that, under competitive markets, market prices for exhaustible resources will affect production costs and the scarcity value of the which, of course, increases as the becomes more scarce. If