Download ECO 424: Natural Resource and Climate Change Review Sheet

ECO 424: Natural Resource and Climate Change
Review Sheet (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:
Donella Meadows et al., The Limits to Growth:
Optimists:
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; 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 GHGs is carbon dioxide (CO2); Accumulating CO2 is linked to fossil fuel 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:
Natural resource misuse can arise from:
--
--
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:
Natural resource accounting:
Exhibit 1-4 on page 16: read and summarize; the 3rd and the 4th paragraphs are important
development rights purchase:
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Two international natural resource issues:
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:
Quantitative variables (numerical):
Qualitative variables (categorical):
Capital in economics: a stock of human-produced artifacts (machines, buildings…)
Natural capital: nature-provided inputs; quantity and quality can be affected by human actions;
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 resource economics:
Environmental economics:
Which parts of the resource world has value depends on—
Technological capacities: different modes of production…
Economic, legal, & regulatory institutions: private firm, a court system, public agencies…
Demographic factors: preferences, population sizes, educational institutions…
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Conservation:
Development:
Preservation:
Use value:
--direct use:
--indirect use:
Nonuse value:
--existence value:
--option value:
--bequest value
Extractive resources:
Nonextractive resources:
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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
a. Nonrenewable Resources:
c. Renewable Resources:
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: The total benefits of increasing the availability of something from q1 to q2 =
area b for the lower D curve, or area a+b for the higher D curve
T
Discounting:
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
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Marginal cost is the change in total cost resulting from a one-unit change in the quantity of
output
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
The following is from the handout:
Present value of net benefits = Net benefits in year 0 + (Net benefits in year 1) [1/(1+r)] + (Net
benefits in year 2) {1/[(1+r)2]} + …,
present value of net benefits = benefits in year 0 – costs in year 0 + sum of all discounted future
net benefits, or
p=b–c+s
(1)
Take derivatives with respect to q (quantity of output of a natural resource good or service) on
both sides:
dp db dc ds

 
dq dq dq dq
(2)
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Dynamic efficiency means that p is maximized. When p is at its maximum point, the first
derivative of p with respect to q is zero,
dp
0
dq
because dp = 0. In other words,
slope 
(3)
dp
is the slope; at the maximum point, the slope is 0 since
dq
rise dp

, and dp = 0.
run dq
From (2) and (3), we have
db dc ds
 
0
dq dq dq
(4)
db
is also called marginal current benefits (MCB),
dq
dc
is also called marginal current costs (MCC), and
dq
ds
is also called user costs (UC).
dq
Thus, (4) becomes:
MCB ‒ MCC + UC = 0
MCB = MCC ‒ UC
UC is user value; UC =
(5)
ds
dq
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
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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: we already proved that MCB = MCC ‒ UC (or , MCB = MCC + │UC│) on page 7,
actually, MCC + │UC│is just marginal total costs MTC. Thus, we know that MCB = MTC. At
this point, we achieve the socially efficient outcome.
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
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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
--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
(the slide is on next page)
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Weak sustainability: the sum of KH+KN must be non-declining
Strong sustainability: KN must be non-declining
What is KH? What is KN?
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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“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
Open Access and the Dissipation of Resource Rent:
Chapter 8 Principles of Analysis, Chapter 9 The Valuation of Natural Resources
Slides 7, 9, 17, 18, 19, 21, 26, 27, 33, 34, 35, 36, 46, 49
Please finish the review sheet by yourself.
Note to slide 46: This is Table 9-1 on page 158. What is the range of willingness to pay?
Then let me provide the partial article (the first article in Table 9-1 by Walsh, Loomis, and
Gillman) that Wenkai Zheng showed us in his presentation:
4. STATISTICAL ANALYSIS
Preservation values were estimated by developing an appropriate econometric model of
willingness to pay by households included in the survey and aggregating values across
households in the state. Following the usual procedure in contingent valuation studies, a model
was estimated of the general form recommended by the Water Resources Council. Willingness to
pay (WTP) by decision- making household unit i for wilderness protection motive j is written as
WTPij = f(Q, S, T, R)
where Q = quantity of wilderness protected; S=socioeconomic variables; T= taste and preference
variables; and R = information relevant to recreation use of wilderness.
Then review homework! This review sheet and homework are all you need for Exam 1.
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