Gold mining and market failure on Morning Edition

Unlike Matthew Kahn and Michael O’Hare, I’m not an environmental expert. I hope they forgive my foray onto their turf.

This morning I heard a charming NPR story, “Mining Resumes At Old South Carolina Gold Mine.” Against the background music of whirring high-tech mine equipment, reporter Greg Collard described the renaissance of gold mining, which provides an economic bright spot for an otherwise-troubled local economy. Then Collard got to this passage:

Greg Collard: The price of gold is selling at record levels. Still, don’t expect gold production to explode in the East, says Michael George. He’s a commodities specialist for the U.S. Geological Survey.

Michael George (Commodities Specialist, U.S. Geological Survey): Out west, it’s all public land, so you can get access to it relatively cheaply. If you’re going to mine out east, you’re going to have to either own the land or own the mineral rights underneath the land, and that can become expensive.

Full stop. Pop quiz for every Econ 101 student: What are the market failures in this passage?

Libertarians and environmental activists don’t often agree. Here is one area in which they really should. For decades, mining companies have received large implicit subsidies to extract resources from public land. They generally don’t have to pay taxpayers a fair market price for the minerals they mine. Many firms can avoid compensating either the taxpayers, local communities, or others for the full costs of environmental damage such activities impose on others.

Gold mining poses significant environmental hazards. As I said, I’m no expert. I suspect we do too much of it—or at least too much of it in the wrong places. The lack of property rights and the lack of proper penalties for negative externalities virtually ensure this.

When companies actually have to pay the full costs by buying mining land outright or leasing it, “that can become expensive.” Isn’t this is another way of saying: “Someplace else, taxpayers are getting ripped off?”

Comments

  1. MobiusKlein says

    Panning for gold is a hobby out here in the west for some.

    In some ways, little different than eating the fish you catch. Except less profitable than fishing.

    And yes, the market failure is the same in some regards. The failure of the fish stocks out west is a testimony to that.

  2. says

    Harold,

    You are correct. The failure to charge market rates for the use of public land is a rip-off of the public generally. It is my opinion that the same rip-off occurs when the government provides other valuable services such as regulation of the radio waves, copyright and incorporation and charges sub-market rates.

  3. Donald A. Coffin says

    Quite right that allowing access to public lands at a price/royalty rate that does not represent the real social costs of mining is a major, major policy error…and subsidy.

    Also, it should be noted that in inflation-adjusted terms, the price of gold is nowhere near a record high. (I’m not even going to get into trying to parse a sentence that reads: “The price of gold is selling at record levels.” My mother the English teacher is revolving in her grave.)

  4. says

    I’m guessing a libertarian response might be that it in fact it is state-capture that has allowed businesses to rape the earth. Otherwise, the markets would determine value, and resources would be priced accordingly.

    Yet this seems a fail, because the “earth”‘s value is often mostly an abstract ideal. Private ownership would reduce access, thereby radically diminishing that value. Plenty of land would thus be available very cheaply in markets – certainly relative to profits gained from destroying natural value.

    It isn’t hard to find examples of exactly this sort of destruction happening today, although to a lesser extent than 100 years ago, when the markets reigned and regulations were minimal.

    So again, the libertarian capture argument against government seems the worse of two evils. At least in theory, a democracy ought to be able to decide for itself how public lands ought to be protected, as well as place limits on externalization. We are a “public”, after all. Of course, the libertarian stars somewhat ironically align behind freedom of political speech, so capture seems inevitable either way; business is adept at not only keeping government off their backs, but grabbing the reigns and actively driving it towards their own interest.

  5. Don K says

    Any libertarian who’s being honest (and I argued just this way in my libertarian days) would agree that land use on public lands in the West is woefully underpriced, primarily because the members of the relevant committees in Congress tended to be westerners who made sure that use of BLM and USFS lands for mining, grazing, etc., was priced dirt cheap to protect jobs in their districts or states. Note honest libertarian specifically doesn’t include the Sagebrush Rebellion “libertarians”, who wanted the low prices, just without those pesky environmental regulations. And of course most real-world libertarians aren’t honest; they may read Friedman, but they skip over the parts about externalities and proper pricing of resources.

    Now, anyone who’s studied even a modicum of environmental Economics will say that, although prices in the East are higher, they’re still probably not high enough because of potential externalities in air, water, or noise pollution (I’m no mining engineer, so I have no knowledge of the techniques being used in South Carolina or their environmental effects).

  6. Dan Staley says

    Unlike Matthew Kahn and Michael O’Hare, I’m not an environmental expert. I hope they forgive my foray onto their turf.

    Sight correction:

    Unlike Michael O’Hare, I’m not an environmental expert. I hope he forgives my foray onto his turf.

    Nonetheless, here in Colorado we are keenly aware of the exploiters trying to exploit the land. And I’d direct your attention to the USC case of Penna Coal to contextualize the free reign given mining companies. I’d also point out mountaintop removal and coal ash spills yo refute the thesis of this piece.

  7. Michael O'Hare says

    I disassociate myself from Dan Staley’s comment: I think Matt’s environmental chops are pretty good.

    This issue highlights the importance of not confusing price and cost in policy debates. Note the word “expensive” in the quote: he means the price is lower. Miners who benefit from this giveaway would love us to carelessly think the cost is also lower. Indeed, government policy that misleads the public about cost by messing with prices (cf subsidized gasoline in Venezuela), or by not correcting them when market failures exist, is in a class of evil by itself, as measured both by the damage it does and by its immorality.

  8. Brett Bellmore says

    I’m confused: How does the government maintaining a commons constitute a market failure. Sounds like a government failure to me.

  9. SamChevre says

    I’m not sure there’s necessarily* a market failure here.

    Land in the East has more competing uses than land in the West; therefore, the cost (not price, but cost) of any land use is lower in the West. (Similarly, the fact that land in Manhattan is much more expensive than land in upstate New York, and so mining could be profitable in Jefferson County but not in Manhattan, doesn’t mean minig rights in Jefferson County are underpriced.)

    *Necessarily, not actually; I don’t know what the cost of land in the West would be, but it is generally much cheaper than land in the East.

  10. says

    I’d echo those who ask why this is a “market” failure when we are talking about the alleged subsidization of economic activity on government-owned and politically managed land. We should expect such management to be inefficient, for all sorts of reasons, but not because of the market. Indeed, it is the lack of a real market — that is, the lack of clearly defined property rights subject to contract and exchange and clear delineations of authority and liability — that is the source of the problem. As is so often the case in environmental policy, it is the lack of market institutions that are the source of the “failure,” not the market itself.

  11. Dan Staley says

    Johnathon, the land under discussion in the west is public land. If you are claiming that the public – the market – is inefficient and cannot properly formulate a political ecology, what does that say about markets in general?

    I’m sympathetic to the idea of better property rights to protect against harm, but we must be careful to remember that suing for compensation means the damage is already done, and have you ever gone up against the lawyers of a multinational corporation? Not the best Plan A, assuredly.

    And Mr O’Hare, I often learn things when I read your posts.

  12. Brett Bellmore says

    “Johnathon, the land under discussion in the west is public land.”

    The terminology here is a bit misleading. “Public” land means the public doesn’t own it, (A bit of doubletalk there.) the government does. So we’re talking government land, which is specifically NOT subject to normal market forces, but instead political forces. Thus, this is an example of government failure, not market failure.

  13. Dan Staley says

    The people have no say in the disposition of the land? Wow. I had no idea.

    This is not to say that I think mining companies are being charged properly for their exploitation, extraction, and waste non-disposal. Here in Colo we are subject to all sorts of mining and extraction promises. This is also not to say I think the federal agencies in charge of the land are doing the best job, but I can’t imagine working in that environment after a hundred years of corporate payouts to elected officials to look the other way…

  14. J. Michael Neal says

    Thus, this is an example of government failure, not market failure.

    Perhaps, but there isn’t a market solution out of this problem, under your definition. The same forces that lead to insufficient charges to extract the minerals would also lead to too low a price if the government divested itself of the land.

    Further, while the description of this as a market failure might be controversial, I don’t think that it is at all controversial to say that it is those legislators who most piously proclaim the virtues of the free market that also are the most stubborn defenders of the underpricing. If you were to turn the matter over entirely to urban socialists, I suspect that you’d get much more accurate pricing for resource extraction.

  15. says

    Dan –

    It’s says nothing about markets in general if the “public” mismanages something through the political process. The political process does not replicate market outcomes. It is subject to all the standard causes of market failure (free-rider and collective action problems, agency costs, information asymmetries, externalities, etc.), only compounded because it is not based upon positive-sum exchange and cannot replicate the information discovery aspects of market processes. In any given case, political management may be preferable to private management within the marketplace, but this is an empirical question. The broader point, however, is that we should not confuse “government failure” for “market failure.” Both occur, but they are not the same thing.

    JHA

  16. Dan Staley says

    It’s says nothing about markets in general if the “public” mismanages something through the political process. The political process does not replicate market outcomes.

    Oh, wow – markets operate in a vacuum outside of sociopolitical influence! Learn something new every day.

  17. says

    Dan –

    My claim is not that “markets operate in a vacuum outside of sociopolitical influence,” but that political outcomes and market outcomes are distinct. That is, managing a resource through market institutions will produce different outcomes than managing a resource through the political process (and, of course, the specific institutional arrangements matter, and there are political influences on markets and vice-versa). When we speak of “market failure” we are trying to identify why a market does not produce an efficient outcome. To label political failures as “market failures” is to deprive the concept of any meaning, because then everything — including failed political interventions — become “market failures.”

    JHA

  18. Dan Staley says

    I wasn’t aware that markets operate outside of the political process. Learn something new every day.

  19. John Shay says

    That’s great for econ 101. However, if you went on to econ 102, you’d come across discussions about highest extractable use for the land. In the east, you’re finding that people would rather use that land for putting up subdivisions (not something I approve of, but that’s what it is), whereas out west, it’s largely desert or otherwise far enough away from population centers that the land is inherently worth less to people. Therefore it’s not just externalities which are responsible for better gold production out west (though I agree this is also a factor) but also alternative uses for the land.

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