Download ECO 424: Natural Resources and Climate Change Review Sheet for

ECO 424: Natural Resources and Climate Change
Review Sheet for Exam 1 (Chapters 1-6 and 8-9)
Chapter 1 Important Issues in Natural Resource Economics
The longest-running issue in natural resource economics—will future supplies be sufficient to
support the economic needs of generations?
Will Resource Scarcity Undermine Economic Growth?—
Pessimists: Thomas Malthus, An Essay on Population (1798): population growth would
inevitably outstrip the ability of nature to provide sustenance in ever-increasing amounts; "The
power of population is indefinitely greater than the power in the earth to produce subsistence for
man."
Donella Meadows et al., The Limits to Growth (1972): scarcity along with pollution would
lead to output declines beginning in the 21st century
Optimists: Scarcities will surely occur in the future; but human beings have the capacity to
overcome scarcities by finding substitutes and by controlling population growth
Thomas Malthus argued that two types of checks hold population within resource limits:
--positive checks, which raise the death rate (include hunger, disease, and war)
--preventive ones, which lower the birth rate (such as abortion, birth control, postponement of
marriage)
The exponential nature of population growth is today known as the Malthusian growth model:
where
P0 = initial population
r = growth rate, also called Malthusian parameter
t = time
e ≈ 2.71828
The Rule of 70 (what’s this? How can you prove it?)
Energy substitution: renewable energy for nonrenewable forms
Primary greenhouse gas (GHG) is carbon dioxide (CO2); accumulating CO2 is linked to fossil
fuel (coal, oil, and natural gas) combustion and deforestation; combustion of natural gas emits
30% less carbon dioxide than oil, and 45% less carbon dioxide than coal.
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4 criteria to identify socially optimal rates of resource use:
Social efficiency—the maximum of net benefits accrued by members of a society
Sustainability—maintaining or augmenting some valued index of human or ecosystem welfare
Irreversibility (not reversible)—need to avoid it; avoid the destruction of unique natural
resources
Fairness—actions impact people in equitable ways
Natural resource misuse can arise from:
--The difficulties that prevent private markets from functioning effectively (ocean fisheries: an
open-access resource)
--Misguided public policy and regulation (Federal energy subsidies)
New types of property rights help solve certain problems—individual transferable quotas (ITOs),
a closed-access system based on private property rights for fisheries
Common resources
Public goods
Conventional GDP: does not allow for natural resource depletion or depreciation in natural
resource capital; does not measure non-market goods and services
Natural resource accounting: involves estimating the non-market value of ecosystem services—
scenic values, support for outdoor recreation, biodiversity preservation……
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Natural capital is the extension of the economic notion of capital (manufactured means of
production) to goods and services relating to the natural environment. Natural capital is thus the
stock of natural ecosystems that yields a flow of valuable ecosystem goods or services into the
future. For example, a stock of trees or fish provides a flow of new trees or fish, a flow which
can be indefinitely sustainable. Other examples: oil deposits, minerals, coal, etc. Natural capital
may also provide services like recycling wastes or water catchment and erosion control. Since
the flow of services from ecosystems requires that they function as whole systems, the structure
and diversity of the system are important components of natural capital.
Exhibit 1-4 on page 16: read and summarize; the 3rd and the 4th paragraphs are important
Development rights purchase: to preserve agricultural land uses, public authority purchases the
right to develop from the farmers, leaving them with the remaining rights on their land and the
freedom to farm the land
Two international natural resource issues: developing countries rely on natural resource capital
(endowments) for economic growth; conflict among countries over access to particular natural
resources
Resource rents: the difference between what a resource is worth in the market and what it costs
to extract, transport, and process it
Rent seeking: competition by the various parties to appropriate larger share of the rents arising
from natural resource extraction
Chapter 2 Natural Resources and the Economy
Life-sustaining resources: oxygen; fresh water; food; proper temperature
Quantitative variables (numerical): continuous or discrete
Qualitative variables (categorical)
Capital in economics: a stock of human-produced artifacts (machines, buildings, equipment…)
Natural resource economics: the study of the flow of natural resource products and services into
an economy; arrow (a)
Environmental economics: the study of the flow of materials and energy residuals back into the
nature (as a “sink” for the reception of wastes); arrow (b)
Which part of the resource world has value depends on:
--Technological capacities: different modes of production…
--Economic, legal, and regulatory institutions: private firm, a court system, public agencies…
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--Demographic factors: preferences, population sizes, educational institutions…
Conservation: the idea of using natural resources at a socially optimal rate
Development: actions that transform natural resources with the intent of increasing their
contribution to human welfare
Preservation: putting resources aside in a state of nonuse or in a state that whatever use allowed
maintains the original resource status
Use value: attributes of nature are being utilized
Use value can be divided into:
--direct use: mining, hunting, swimming, white-water rafting...
--indirect use: bird watching (scenic value; natural resources are simply present to the senses)…
Use value can also be divided into:
--use value from extractive resources which yield natural resource products as physical resources
removed from nature and made available for use (mining ores, harvesting timber, fishing,
hunting...)
--use value from nonextractive resources which yield valuable services without being removed
from their natural setting (resource-based recreation like backpacking and boating); ecosystem
protection)
Nonuse value: value expressed by human beings for the existence of natural resources
--existence value: the benefit received from the continuance of an environmental good
--option value: reflects the willingness to preserve an option to use the environment in the future
--bequest value: reflects the desire to leave a healthy ecosystem to future generations
Modeling Resource Use and Charge: general formula is S = S – Q + ΔS
1
0
0
S : amount of resource available in period 1
1
S : amount of resource available in period 0
0
Q : amount of resource used in period 0
0
ΔS: increment to the resource in period 0
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a. Nonrenewable Resources: S1 = S0 – Q0
since ΔS = 0 (there is no replenishment or increment of the resource), for a known deposit
c. Renewable Resources: S1 = S0 – Q0 + ΔS
Timber (fisheries): the amount of wood in year 1 = what existed at the beginning of period 0 –
what was harvested during period 0 + biological growth increment of the timber in period 0 that
was not harvested
S1 = ΔS
A free-flowing river (nonaccumulating–it flows by and it is gone; annual replenishment does not
add to preexisting quantity)
A natural resource is reversible if it is possible that S1 > S0
Most renewable resources are reversible
Utilization of a nonrenewable resource is irreversible, at least as long as we talk about a
particular deposit
Chapter 3 Willingness to Pay/Demand
Diminishing marginal WTP (MWTP): as the number of units consumed increases, the MWTP
for each additional unit of that good goes down
Total WTP for a given consumption level: is the whole area under the marginal WTP curve from
the origin up to the consumption quantity
MWTP curve is demand curve
Aggregate MWTP/Demand Curve: For private goods: horizontal summing; For public goods:
vertical summing
Figure 3-5, page 49
Discounting:
T
PV  
t 0
FVt
(1  r )t
Chapter 4 Costs/Supply
Opportunity cost of an action = explicit cost + implicit cost = dollars actually paid out + value of
something sacrificed when no direct payment is made
Marginal cost is the change in total cost resulting from a one-unit change in the quantity of
output
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Total production costs: is the area under the marginal cost curve between the origin and the
quantity in question
C3
C1
C2


 ...
Present value of costs = C +
2
1  r (1  r ) (1  r )3
0
Technological change normally makes production less costly; this shifts the marginal cost
curve downward (as a result of the research and development that has gone into the
technology): Figure 4-5, page 63
Firms’ marginal cost functions are their supply functions
Chapter 5 Efficiency and Sustainability
Static efficiency: from the perspective of a single time period, in particular the present one
The rate of output q* is socially efficient; it yields the maximum net benefits to society (Page 71:
Figure 5-1)
Total social benefits = a + b
Total social costs = b
Net social benefits = (a + b) – b = a; also = CS + PS
At other output levels, net benefits are not maximized
Dynamic (intertemporal) efficiency: To choose one time series of quantities that gives the
maximum present value of net benefits
MNB = MCB – MCC + UC
(how do you derive it?)
User value is the decrease in the discounted value of future net benefits when the use of the
resource at present increases by one unit; user value is a negative number since it is a decrease in
net benefits
If the choices of today’s output actually have no future consequences, then user costs would be
zero—How much water to take out of a passing river to irrigate some crops: increasing the
amount withdrawn is not likely to have an impact on future water availabilities in the river
Page 74: Figure 5-3
For a static problem: the intersection of MCC with MCB gives q01 as the social efficient rate of
output
For an intertemporal problem: the intersection of MTC (= MCC + │UC│) with MCB gives q0*
as the social efficient rate of output in the current period
Note: MCC + │UC│is just marginal total costs (MTC). Thus, we know that MCB = MTC. At
this point, we achieve the socially efficient outcome.
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Natural resource rents: The in situ price of a natural resource is its price as situated in the natural
world;
--The stumpage price for wood, what it sells for on the stump
--The price of a ton of copper in the ground
--The price of land to be used for farming
The in situ price of a natural resource is called its resource rent: it is the value of something that
the workings of nature itself have made available
The lobster market in New England—Figure 5-4 on page 75: very important
The marginal rent = the market price – marginal harvesting costs = $3.50 – $2.80 = $0.70
Draw the graph:
Compare Figure 5-4 (p.75) with Figure 5-3 (p.74): Resource rent and user cost are the same! But
they emphasize different perspectives. User cost refers to the value of future consequences of
today’s decisions; rent refers to a price
A price is a market phenomenon. If there is no market, there can be no rent. If resources produce
services that do not pass through markets, then the rent for these resources will not reflect these
services
Read Page 78: Exhibit 5-1 and summarize. Very important!
Sustainable development: “development that meets the needs of the present without
compromising the ability of future generations to meet their own needs”
Sustainability implies that future generations are to be no worse off than today’s generation. In
the sense of the physical supplies and availabilities of natural resources, future generations
should have no smaller supplies than currently exist
--For renewable resources: possible to remain sustainability
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--For nonrenewable resources: any extraction rate today must lead to reduced availabilities at
some time in the future; We may interpret it as nondiminution of the total of natural resources;
Drawing down a nonrenewable natural resource could be compensated for by augmenting
supplies of a renewable resource
A broader sustainability: Use of a nonrenewable natural resource is sustainable if the value of the
resource used up is matched by capital investments of equal value in other natural resources
(renewable natural resources) or in productive nonresource capital (human capital and physical
capital)
Ch5—slide 16: need to know how to explain that sustainability is feasible for the first two
production functions; but sustainability is not feasible if we have the third production function
Weak sustainability: the sum of KH+KN must be non-declining
Strong sustainability: KN must be non-declining
What is KH? What is KN?
KH: Human-made capital including human capital and physical capital
KN: Natural capital including renewable resources and nonrenewable resources
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Most economists are weak sustainabilists
Chapter 6 Markets and Efficiency
Social efficiency can be found at the intersection of MSB curve and MSC curve
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Open Access and the Dissipation of Resource Rent:
The resource that is open to unrestricted use by anyone who might wish to utilize it: ocean
fishery, hunting, public parks…
“The Tragedy of the Commons” (Garrett Hardin, Science, Vol. 162, 1968, pp. 1243-1248):
Open-access externality that leads to overuse of the resource is the diminution in the quality of
the pasture as more and more animals are out on it
Page 95, Table 6-2, public beach: the fifth visitor reduces the value of the beach to the four
already there, from $20 to $18 for each one
Public beach example: efficient visitation level is 4 visitors; benefits – costs = $80 – $48 = $32
$32 is a return attributable to the resource itself (the beach); this is the resource rent produced by
the beach
If visitation level had risen to 8 people, then benefits – costs = $96 – $96 = $0; open access had
led to the dissipation or disappearance of all natural resource rent
Chapter 8 Principles of Analysis, Chapter 9 The Valuation of Natural Resources
Slides 9, 12, 14, 21, 22, 30, 34, 38, 39, 40, 52
Then review readings on my web site and homework!
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