IZA DP No. 14279: Low, High and Super Congestion of a Renewable Natural Resource under Autarky and Trade
Numerous developing economies depend vitally on renewable natural-resource (NR)-based commodities. This study develops a general equilibrium model to examine the steady-state impact of changes in a small economy's NR congestion under open access and optimal regulation. This issue has often been examined under 'low' congestion (LC) – with MC > AC and both upward sloping. Two more categories, 'high' (HC) and 'super' (SC) congestion – whose AC is backwardbending and MC < 0 – are identified, with regulation's impact under SC opposite to that under HC [e.g., a tax reduces (raises) price and raises (reduces) output under SC (HC)]. Findings include: i) Welfare and NR losses under open access are typically a multiple to one order (one to two orders) of magnitude greater for HC (SC) than for LC countries, with congestion determined by population (world price) level under autarky (trade); ii) Trade openness (and termsof- trade improvements) reduces an exporter's welfare and NR, and reduce both sectors' output under HC and SC, though it may prevent population growth to cause NR and society's collapse; iv) Welfare and NR open-access costs increase (decline) with population under autarky (trade); v) Though trading partners' shift from open access to optimal regulation is said to create a 'NR destruction haven' effect and reduce exporters' NR, the opposite is likely under SC; vi) Results are robust to various alternative functional forms and parameter values (e.g., low vs. middle-income countries' food expenditure shares). Policy implications are provided.