Question

It has been argued that any government policy aimed at nonrenewable resource conservation is an unwarranted interference with the free market. According to this point of view, if a resource is likely to become scarce, the people most likely to realize this are the private investors and traders who deal in the resource. If they anticipate scarcity, they will hold stocks of the resource for future profit, driving up its price and leading to conservation. Any action by government bureaucrats is likely to be less well informed than those of profit-motivated private firms. Evaluate this argument. Do you think that there are cases in which government should step in to conserve specific resources? If so, which policy tools should they use?

Answer 1

The argument exposed in the question does not address the fact that natural resource scarcity and/or depletion cannot be so evident, and as result, economic agents do not necessarily have the incentive to hold more of them, and drive up the price.

Besides, natural resources provide ecosystemic and enviromental services, that generate positive externalities, and these positive externalities are not accounted for in the prices (this is why they are externality), causing the market prices that are paid for natural resources to be lower than they should.

The government can use to strategy to promote natural resource conservaiton:

1) Account for the positive externalities, and increase the price that is charged for the use. It can be a tax.

2) Simply step in and forbid the use of some natural resources after a certain point is reached. It can be a quota system.