Inelastic Demand and the Extinction of Species

I thought I might describe an economic mechanism that works specifically toward species endangerment and extinction. That has to do with commodity price inelasticity.

Everyone remembers about price elasticity, right? Well, let’s review anyway.

The demand curve for a commodity is considered elastic if a certain differential percentage increase in supply results in a less than that differential decrease in price. Conversely, if a differential percentage increase in supply results in a greater than differential percentage decrease in price, the commodity is considered inelastic. These relationships also apply on the way down on the supply curve..

This relationship means that, for inelastic demand commodities, increases in total supply result in actual decreases in total income for all aggregated suppliers. For example, if a 1% increase in supply results in a 2% drop in price, all suppliers will receive only 1.01*0.98 income, i.e. slightly less than 99% of their original income. One frequently cited example is farm commodities. As food supplies grow, farmers as a whole receive less and less money. While this may be seen as bad by farmers, it positively benefits the nation as a whole, since less and less must be spent on food, which frees up resources for other things.

Now consider the converse case, where the supply of the commodity is decreasing. Under decreasing supply conditions, the share of gross national income that goes to the suppliers of that commodity increases, in both relative and absolute terms. Thus, it would pay suppliers as a whole to reduce the available supply.

This is the usual argument made against commodity monopoly: if a single (or small number) of suppliers can restrict supply sufficiently, it is possible to increase total income by producing fewer goods. Similarly, even if there are a large number of suppliers, a restriction in supply will actually benefit suppliers as a group. So, for example, minimum wage laws benefit low wage workers as a group, though it may penalize some low wage workers by reducing the number of jobs. The monetary loss from reduced jobs, however, will be less than the monetary increase due to increased wages. Similarly, farmers as a group are benefited by crop restrictions, such as tobacco and peanut allotments.

A naturally restricted commodity does not need a regulatory restriction to achieve monopolistic effects. In the case of a plant or animal species, especially one that is not domesticated, over-harvesting can reduce the future availability of that commodity to all suppliers. Thus, individual suppliers do not need to have price-setting power; all they need to do is to harvest as much as they are able. This results in a restriction of future supply, which leads to higher prices, which increases their own total income.

Presumably, at some point one reaches diminishing returns, where the commodity becomes a luxury good with a more elastic demand curve. However, by that time the species may be endangered, and any “fellow-traveler species” (think dolphins/tuna), may be extinct.

I am reasonably certain that this mechanism is at least as much responsible for the decline in world fish catches as the conventional “tragedy of the commons” phenomenon. In a “tragedy of the commons” scenario, privatizing the commons might have a useful effect. In an inelastic demand scenario, it would not help at all, unless there were a single private entity monopolizing all fisheries.

This, of course, is identical to the case of governments producing a regulatory agency, except that the benefits to private ownership accrue only to the owners of the resource.