Natural resources, goods, bads and alternative institutional frameworks

The purpose of this paper is to extend and modify the neoclassical paradigm to adequately account for the unique features of natural resources. These unique features relate to the common property nature of resources, pollution and associated externalities, environmental degradation, technological progress, and the possibility of maximum resource capacities. This extension is accomplished by the specification of joint product goods and bads of productive inputs. The conceptual formulation is employed to examine four alternative institutional structures. In each case, public policies are needed to achieve the optimal steady-state. For the first structure, a pollution tax and a subsidy on new abatement equipment due to learning are both needed to support the optimal steady-state. For the second structure a user charge must be imposed upon resource extraction. The third structure investigates endogenous agency budgets, presuming the revenues received by the agencies are limited to the fees paid for pollution emissions. Finally, the frequent impracticality of measuring pollution emissions leads to an institutional framework in which the tax on pollution must be discarded and a tax on the resource input is required. To achieve an optimum solution, this tax must be combined with a subsidy on pollution-abatement equipment.