Intro to Econ: Scarcity

Economics is a social science concerned with the production, distribution, and consumption of goods and services. It studies how individuals, businesses, governments, and nations make choices on allocating resources to satisfy their wants and needs, trying to determine how these groups should organize and coordinate efforts to achieve maximum output.

Economics can generally be broken down into macroeconomics, which concentrates on the behavior of the aggregate economy, and microeconomics, which focuses on individual consumers and businesses.

One of the earliest recorded economic thinkers was the 8th-century B.C. Greek farmer/poet Hesiod, who wrote that labor, materials, and time needed to be allocated efficiently to overcome scarcity. But the founding of modern Western economics occurred much later, generally credited to the publication of Scottish philosopher Adam Smith’s 1776 book, An Inquiry Into the Nature and Causes of the Wealth of Nations.

The principle (and problem) of economics is that human beings have unlimited wants and occupy a world of limited means. For this reason, the concepts of efficiency and productivity are held paramount by economists. Increased productivity and a more efficient use of resources, they argue, could lead to a higher standard of living.

Despite this view, economics has been pejoratively known as the “dismal science,” a term coined by Scottish historian Thomas Carlyle in 1849. He used it to criticize the liberal views on race and social equality of contemporary economists like John Stuart Mill, though some sources suggest Carlyle was actually describing the gloomy predictions by Thomas Robert Malthus that population growth would always outstrip the food supply.

Scarcity

Scarcity refers to resources being finite and limited. Scarcity means we have to decide how and what to produce from these limited resources. It means there is a constant opportunity cost involved in making economic decisions. Scarcity is one of the fundamental issues in economics.

Examples of scarcity include:

• Land – a shortage of fertile land for populations to grow food. For example, the desertification of the Sahara is causing a decline in land useful for farming in Sub-Saharan African countries.
• Water scarcity – Global warming and changing weather, has caused some parts of the world to become drier and rivers to dry up. This has led to a shortage of drinking water for both humans and animals.
• Labor shortages – In the post-war period, the UK experienced labour shortages – insufficient workers to fill jobs, such as bus drivers. In more recent years, shortages have been focused on particular skilled areas, such as nursing, doctors and engineers
• Health care shortages – In any health care system, there are limits on the available supply of doctors and hospital beds. This causes waiting lists for certain operations.
• Seasonal shortages – If there is a surge in demand for a popular Christmas present, it can cause temporary shortages as demand is greater than supply and it takes time to provide.
• Fixed supply of roads – Many city centres experience congestion – there is a shortage of road space compared to number of road users. There is a scarcity of available land to build new roads or railways.

How the Free Market Solves The Problem of Scarcity

If there is a scarcity of a good, the supply will fall causing the price to rise. In a free market, this rising price acts as a signal and therefore demand for the good falls (movement along the demand curve). Also, the higher price of the good provides incentives for firms to:

• Look for alternative sources of the good e.g. new supplies of oil from the Antarctic.
• Look for alternatives to oil, e.g. solar panel cars.
• If we were unable to find alternatives to oil, then we would have to respond by using less transport. People would cut back on transatlantic flights and make fewer trips.

Demand Over Time

In the short-term, demand is price inelastic. People with petrol cars, need to keep buying petrol. However, over time, people may buy electric cars or bicycles, therefore, the demand for petrol falls. Demand is more price elastic over time. Therefore, in a free market, there are incentives for the market mechanisms to deal with the issue of scarcity.

Causes of Resource Scarcity

Resource scarcity is defined as a situation where demand for a natural resource is exceeding the supply – leading to a decline in available resources. When we talk about scarce resources, we usually imply that current use is unsustainable in the long-term.

Scarcity can involve non-renewable resources, such as oil, precious metals and helium. It can also involve potentially renewable resources, which are being consumed faster than their ability to replenish (e.g. over-fishing, excess use of fresh water.)

Causes of Scarcity

• Demand-induced – High demand for resource
• Supply-induced – supply of resource running out.
• Structural scarcity – mismanagement and inequality
• No effective substitutes.

Demand-induced scarcity

A rise in demand can cause a resource to become scarce. For example, when a civilisation has a small population, freshwater is abundant with hardly any opportunity cost. However, with a rising population, a well or reservoir may fail to keep up with the increase in demand. For example, between 1950 and 2000, the population of Sub-Saharan Africa increased from 177 million to 657 million creating increased pressure on the limited farmland.

The global population has increased from 2 billion people in 1927 to 7 billion in 2012. This dramatic increase in people (combined with rising incomes and economic output) has put a greater strain on many natural resources – causing greater scarcity amongst some resources and new forms of scarcity – such as rising sea levels.

According to a UN report, the last century saw a dramatic increase in annual global resource extraction – From 7 billion tons (7 Gt) in 1900 to about 50 billion tons (55 Gt) in 2000 (UN Renewable Consultation) p.19

Demand induced scarcity could occur due to:

• Growth in population.
• Growth in real GDP and incomes enabling people to consume more resources than before.
• Changes in preference, e.g. growth in demand for mobile phones, places greater demand on certain metals, like cobalt and nickel used in the production of lithium batteries. Increase

Supply Induced Scarcity

If the supply of a resource is depleted or put under threat, it will cause a shortage of the good and scarcity. In Sub-Saharan Africa, climate change has contributed to the increased desertification of the land and encroachment of the Sahara desert. Since 1900, the Sahara desert has grown 250km to the south. There is a similar situation in China with the growth of the Gobi desert reducing land.

Supply induced scarcity can also be due to:

• Bad weather/crop failure. A localized scarcity can occur if there are particular problems. For example, a fungal disease could decimate a crop like olive trees, causing a shortage of olives.
• Degradation of supply. Another form of scarcity is when the resource is polluted making it unfit for consumption. For example, a nuclear power disaster causes radiation which makes drinking water and farmland unusable in the surrounding area.

Structural Scarcity

This occurs when the problem is one of distribution. There is abundant water in the world, but in certain areas, there may be a shortage of supply due to lack of access. A country with great inequality may cause scarcity for some. For example, resources may be owned by a small percentage of the population and the poor may be unable to afford to buy the water supply.

Other Factors Contributing To Scarcity

No Alternatives

It is hoped that when a good becomes scarce the market mechanism will provide an incentive to develop alternatives. For example, with oil becoming more scarce, there is an incentive to develop electric cars which run on solar power or wind power. However, if technological substitutions are not available then scarcity is a more serious problem, for example, there is often an alternative to oil, but if water becomes scarce – there is no meaningful alternative.

Damage to Resources Can Not Be Rectified

When clean air becomes polluted through radiation and pollution, it is not easy to end the scarcity of clean air. The air is dependent on global factors and even if pollution is stopped, some pollutants and radiation will last for a long time. Once some pollutants are released, they will last for a considerable time.

Potential Market Failure

With scarcity, there is a potential for market failure. For example, firms may not think about the future until it is too late. Therefore, when the good becomes scarce, there might not be any practical alternative that has been developed.

Another problem with the free market is that since goods are rationed by price, there may be a danger that some people cannot afford to buy certain goods; they have limited income. Therefore, economics is also concerned with the redistribution of income to help everyone be able to afford necessities.

Another potential market failure is a scarcity of environmental resources. Decisions we take in this present generation may affect the future availability of resources for future generations. For example, the production of CO2 emissions lead to global warming, rising sea levels, and therefore, future generations will face less available land and a shortage of drinking water.

The problem is that the free market is not factoring in this impact on future resource availability. Production of CO2 has negative externalities, which worsen future scarcity.

Tragedy of the Commons

The tragedy of the commons is a situation where there is overconsumption of a particular product/service because rational individual decisions lead to an outcome that is damaging to the overall social welfare.

The tragedy of the commons theory assumes that when making decisions, people take the course of action that maximises their own utility. However, if many people seek to do this, the net effect may be to deplete a resource making everyone worse off in the long run.

The tragedy of the commons was first mentioned by the Victorian economist William Forster Lloyd, in 1833. He used a hypothetical area of common grazing land, in which villagers all took their cows to this common grazing land, but this led to overgrazing and a loss of the resource.

In theory, individuals could limit their use so that they don’t deplete the common resource. However, there is a free-rider problem. Where people rely on others to cut back their production. If everyone free-rides and maximizes their use, then we get a situation of over-consumption.

Free Rider Problem

This occurs when people can benefit from a good/service without paying anything towards it. It also occurs, if people can get away with making only a token contribution (Something less than their overall benefit). If enough people can enjoy a good without paying for the cost – then there is a danger that, in a free market, the good will be under-provided or not provided at all.

The free-rider problem is common with public goods – goods with non-excludable benefits, e.g. if you reduce pollution, everyone in society will benefit. Once pollution is reduced – everyone has to benefit. Another way to explain the free-rider problem is a slogan like “Let George do it” – where George stands for the rest of the world.

Public Good

A public good has a classic free-rider problem because public goods have two characteristics:

1. Non-excludability – you can’t stop anyone from consuming good
2. Non-rivalry – benefiting from good or service does not reduce the amount available to others.

Therefore, public goods like national defence, street lighting, beautiful gardens may not be provided in a free market.

Solutions to the Free Rider Problem

Tax and Government Provision

One solution is to treat the many beneficiaries as one consumer and then divide the cost equally. For example, UK national defence costs £31bn. This results in higher taxes for UK taxpayers. Therefore the cost of national defence is paid indirectly by UK taxpayers. This ensures everyone who benefits from the service pays towards the cost. Some may dislike this approach e.g. some anti-war protesters have tried to withhold a certain % of their tax arguing they don’t want to make contributions to illegal wars. But, most people accept paying taxes.

Austrian economists may criticise this approach arguing there is no guarantee the government knows consumer preferences and coercive action to make everyone pay and provide the good could lead to goods society doesn’t really need.

Appealing to People’s Altruism

For some goods like visiting a garden, the garden may be able to raise funds by asking for donations if you enjoy your visit. There will probably be many ‘free riders’ who don’t make a donation. But, enough people may be willing to make a donation to fund the cost of the garden/museum.

This solution is only effective for services which have a relatively low cost. People don’t mind paying £4 if other’s free ride. But, if there was a voluntary donation of £1,000 for national defence, would anyone pay it?

Make a Public Good Private

A beautiful garden could be seen as a public good. However, if you erect a high barrier and limit entrance to those willing to pay, it loses its feature as a public good and becomes a private good.

Legislation

To deal with the free-rider problem associated with overconsumption of common resources. The government have tried various options such as:

• Quotas – difficult to implement and difficult to monitor
• Legislation – on size of net size, number of fishing vessels
• Compensation to move away from fishing.

Overfishing

Individual fisherman have an incentive to catch as many fish as possible. However, if many fishermen have this same motive, then it can lead to fish stocks being depleted as fish are caught at a faster rate than they are replenished. Unchecked, this can lead to a collapse in fish stocks due to over-fishing.

If one individual fisherman holds back on his catch to try and preserve overall fish stocks, it may prove futile because many other fishermen continue to catch as much as possible. The net result is that fisherman don’t have any incentive to hold back, so they might as well try and catch as much as possible.

Voluntary Agreements to Avoid The Tragedy of the Commons

Elinor Claire “Lin” Ostrom, an American economist, investigated local communities who did work together to successfully manage common resources. She used the term ‘common pool resource management’ to describe how local individuals could come together to make informal arrangements to manage and use the pool of resources. Her examples of local initiatives led to the use of the term (sometimes known as Ostrom’s Law):

“resource arrangement that works in practice can work in theory.”

However, this co-operation is more difficult for an international resource like fishing in the north sea. In this case, the multi-national level fishing makes it more difficult to reach an agreement.

Example

For example, we may have a plot of land which could tolerate 20 animals grazing per year. This level is sustainable from year to year.

However, if the land is open, there may be 40 villagers each bringing their own cow to graze the land. This leads the village green to be overgrazed meaning the village loses this common land. If there was regulation or a common agreement to limit grazing to 20 cows, then the net welfare would be much greater for the village as it would last from year to year.

Policies to Overcome Tragedy of the Commons

1. Voluntary agreements along the lines of Elinor Ostrom, with informal arrangements and local monitoring. Strong sense of civic responsibility can make these arrangements more successful.
2. Government regulation. Government regulation can limit fish catches or size of fishnets to allow young fish to escape.
3. Clearly defined property rights. If common land is given over to private ownership, the private owner has a stronger incentive to manage the resource for optimum outcome. However, the problem of property rights is that it can lead to equity issues (private owners gain monopoly power over tenants). Also if owner pursues short-run profit maximisation he may make the same mistakes.

Quotas

One solution to dealing with scarcity is to implement quotas on how much people can buy. An example of this is the rationing system that occurred in the Second World War. Because there was a scarcity of food, the government had strict limits on how much people could get. This was to ensure that even people with low incomes had access to food – a basic necessity.

A problem of quotas is that it can lead to a black market; for some goods, people are willing to pay high amounts to get extra food. Therefore, it can be difficult to police a rationing system. But, it was a necessary policy for the second world war.

References

1. Classical economics: Thomas Robert Malthus. (2012, March 18). Policonomics | Economics made simple. https://policonomics.com/lp-classical-economics-robert-malthus/
2. The first “Economist”: Hesiod and the problem of scarcity. (2020, August 28). The Ideas of Economists. https://ideasofeconomists.com/2018/06/21/the-first-economist-hesiod-and-the-problem-of-scarcity/
3. Is economics really a dismal science? (n.d.). Investopedia. https://www.investopedia.com/terms/e/economics.asp
4. John Stuart mill. (n.d.). Econlib. https://www.econlib.org/library/Enc/bios/Mill.html
5. Pettinger, T. (2019, October 31). Causes of resource scarcity. Economics Help. https://www.economicshelp.org/blog/151207/economics/causes-of-resource-scarcity/
6. Pettinger, T. (2020, February 27). Scarcity in economics. Economics Help. https://www.economicshelp.org/blog/586/markets/scarcity-in-economics/
7. Pettinger, T. (2020, March 4). Free rider problem. Economics Help. https://www.economicshelp.org/blog/1626/economics/free-rider-problem/
8. The sveriges Riksbank prize in economic sciences in memory of Alfred Nobel 2009. (n.d.). NobelPrize.org. https://www.nobelprize.org/prizes/economic-sciences/2009/ostrom/facts/
9. William F. Lloyd. (n.d.). History of Economic Thought. https://www.hetwebsite.net/het/profiles/lloyd.htm

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