Markets conserve resources

Free market prices are a precious source of information for firms as they reflect the relative scarcity of resources.

Without any top-down command or control, prices of resources spontaneously inflate when their supplies are scarce. Higher prices signal to consumers to purchase less scarce resources or switch to alternatives, spawning new industries that employ different resources. From the perspective of suppliers and entrepreneurs, the prospect of higher profit returns incentivises them to boost their supply either by searching for new resource deposits or discover new means to attain more resources.

A crucial ingredient of the free market conservation of resources is the institution of private property rights. Science writer Ronald Bailey observed that fisheries governed by property rights, apart from outperforming in yields, have the capacity to preserve and even rebuild fish stocks. Property rights create a profit incentive for sustainable resource management among the rights owners through measures such as breeding programmes and limiting access via individual transferable quotas. Bailey explains that in the tragedy of the commons, ‘since nobody owns the resource, everybody exploits it as much as they can because they know if they leave something behind, the next guy is just going to take it.’

Nonetheless, the free market solution may be counterintuitive as the threat of our essential resources depleting triggers our instincts to summon our governments to intervene. Unfortunately, state policies usually undertaken such as nationalising mining and oil companies or offering fuel subsidies distort free market prices that suppliers and consumers rely upon to guide their purchases and direct their innovation. Thus, free market corrections such as consumers switching to alternatives or suppliers ramping up their search for new sources of resources are inhibited, delaying meaningful solutions to resource scarcities.

As long as our markets are free, today’s knowledge is tomorrow’s resources.