How Much Should Natural Resources Really Cost?

Do you ever consider how much you should really be paying for the goods and services we pay for? The clothes you wear, the electronics you buy, the cleaning supplies, the furniture, and the list goes on and on. There are so many more aspects that go into goods and services today than ever before. Now when we are to consider the “true” cost of the goods and services we purchase in our every day lives it is imperative that we understand some key terms that relate to the timelines our goods and services follow through extraction, production/manufacturing, consumption, and disposal.

Externality: An unintended and uncompensated loss or gain in the welfare of one party resulting from an activity by another party.

Hotelling Rule: States that at the margin, the rate of return from holding a resource in the ground (its expected price increase) must be equal to the rate of return from exploiting it now and investing the profits.

Price Elasticity of Demand: A measure of the responsiveness of the quantity demanded of a good to a change in its price. It is calculated as:

 Marginal External Cost: The cost to society of the negative externality that results from one more unit of activity by an economic agent.

Marginal User Cost: The value of one more unit of the resource in its natural state. In a perfectly competitive economy, marginal user cost would in theory equal the price of a resource minus its marginal extraction cost.

Now that we have defined the key terms regarding the process of identifying the true cost of natural resources, we can begin to discuss how we figure the costs of natural resources and the complicated world behind it.
Economic analysts frequently assume that the most easily accessible resources will be extracted first, this assumption is incorrect for a multitude of reasons. First, the extraction of the most easily accessible resources is inevitable, but the price will be a lot less than resources that are harder to extract simply due to the resources and time required to extract either resource. So the price that is set upon resources that are a lot harder to extract is a lot more expensive than the easiest extracted resources, because they are less cost effective to extract. So the logical economic decision is, if the technology is available, to extract the less accessible resource as the price may be set to incur a most profitable return. An example is the extraction of copper or silicon, to the extraction of gold, or silver. Copper and silicon do not yield profitable returns in small amounts, compared to the returns of gold and silver.
The real problem behind the prices set upon the resources extracted is the amount of externalities that are incorporated. This is usually the smallest amount possible, because as more and more externalities are added it becomes less and less economically efficient to extract these resources. So what system should we incorporate that identifies externalities, utilizes marginal external cost when considering the consequences of extraction, and implements marginal user cost when establishing a value for the natural resources when in their natural states.
The system that is implemented would reflect prices that are not based on scarcity or abundance, the prices would be set through all the above defined terms. If the extraction of gold is harmful to the environment then the negative externalities will be incorporated into the overall cost. If the marginal external cost is high for the extraction of a specific natural resource then the price will be set regarding that impact. So when we look at the prices of specific natural resources the prices do not reflect the scarcity of the resource, instead they reflect the true cost behind the extraction process.

The future of the planet's natural resources is certain, there will be continued extraction of them. The difference is that as the processes become more expensive and environmentally degrading the true costs of the resources will begin to be clear as mining companies are required by law to incorporate externalities, and regulate their marginal external costs and marginal user costs. When this happens we will begin to see prices that truly reflect what natural resources should really cost.

Thank you for your interest, please comment and subscribe.

Onward,

Hayden van Andel