The Principal External Costs and Benefits of Marine Mineral Recovery
Authors: Mead Walter J. , Sorensen Philip E. 
Published: October 2008

Investments in resource development by private enterprise will produce socially optimal results in only those instances where (1) monopoly power by private enterprise and unjustified interference with the market mechanism by government are absent, and (2) external (spillover) benefits and costs are absent. Government interference in order to raise the price of oil has caused a significant divergence between private and social benefits such that over-investment in oil exploration and development has resulted in serious resource misallocation. For marine minerals requiring major technological innovations in deep sea dredges as a prerequisite to development, the technological external benefits appear to be sufficiently large to constitute a primafacie case for a public subsidy. However, the amount of such a justified subsidy still does not appear sufficient to render deep sea manganese recovery profitable in the foreseeable future. On the other hand, there are external costs due to marine mineral recovery. These spillover costs are particularly evident in near-shore oil recovery. Efficient resource allocation within a free enterprise system requires that all externalities be internalized so that they enter into the profitability calculations of those economic units affecting the development of natural resources.

INTRODUCTION

Decentralized decision making is an identifying characteristic of a pure free enterprise economy. Decisions regarding which resources to develop, when, how, and by whom, are made by individual business units rather than by government. Planning is provided by a relatively free price system where business units are motivated by pursuit of private profit. This system can be shown, in terms of a theoretical model, to produce optimum resource allocation and efficiency where prices are determined by effective competition, and where there are no externalities.

The purpose of this paper is to explore the effectiveness of private enterprise decision making processes regarding marine resource development. The paper is divided into three parts. First, we will identify the private decision making process. Second, the important externalities problem will be defined and introduced as a distorting influence for private decision making. Third, the principal external costs and benefits of marine mineral recovery will be identified, and the concept and method of calculating a social rate of return will be set forth.

PRIVATE DECISION MAKING IN RESOURCE DEVELOPENT

The guiding motive for business in resource development, as in other areas, is pursuit of private profit. To the extent that the investment decision making process is rational, private rates of return for prospective investments are calculated. This involves estimation of required investments, estimation of the flow of gross revenues over time, and estimation of corresponding operating costs through the life of projects. This calculation is illustrated in Figure 1. In year 1 an investment outlay is shown without corresponding gross income. In year 2 relatively heavy investment and initial operating costs are shown corresponding with relatively low gross income. As income builds up in years 3 and 4, annual costs and revenues are reduced to a steady state condition showing annual revenues in excess of annual costs and a corresponding annual operating profit.