ECON 4925 Resource Economics Autumn 2010 Lecture 1 Introduction

1. ECON 4925 Resource EconomicsAutumn 2010Lecture 1 Introduction Lecturer: Finn R. Førsund 4925 Lecture 1

2. Perman et al.Chapter 1.2.1 • Classical economists: 1700-1800 century • Development of natural resource economics • Adam Smith, Thomas Malthus, David Ricardo, John Stuart Mill • Economic growth: importance of natural resources (land) • Living standards in the long run subject to constraints (land) • Diminishing returns , inevitability of a stationary state ECON 4925

3. Perman et al.Chapter 1.2.1 • Adam Smith: markets and allocation of resources, invisible hand • Malthus: population growth geometric and food output growth arithmetic • Ricardo: subsistence wage level in steady state, land in varying quality • John Stuart Mill: diminishing returns, but also growth of knowledge and technical progress. Amenity values, first environmental economist? ECON 4925

4. Perman et al.Chapter 1.2.2 • Neoclassical economics: marginal theory and value in exchange • 1870+, Jevons, Menger, Marshall (consumer surplus), Walras (general equilibrium) • Production- and utility functions • Keynes: short-run use of resources • Neoclassical growth theory: absence of natural resources, introduced from 1970+ ECON 4925

5. Perman et al.Chapter 1.2.3 Welfare economics • Rankings of allocation must be based on ethical criterions • Utilitarian moral philosophy, Hume, Bentham, Mill. Weighted average of the total utility levels enjoyed by all individuals in the society • Pareto optimality (1897) ECON 4925

6. Perman et al.Chapter 2 • Can the global economic system continue to grow without undermining the natural systems, which are its ultimate foundation? • Can poverty be alleviated in such ways that do not affect the natural environment in such a way that future economic prospects suffer • Interrelationship between poverty, economic development and the state of the natural environment • World Commission on Environment and Development 1987 Our Common Future ECON 4925

7. Issues in resource economics • Types of resources • Non-renewables • Minerals, oil, gas, coal • Renewables • Fish, forests, water • Questions to be studied • Optimal depletion of non-renewables • Optimal harvesting of renewables

8. Sustainability • Can the global economic system continue to grow without undermining the natural systems, which are its ultimate foundation? • Can poverty be alleviated in such ways that do not affect the natural environment in such a way that future economic prospects suffer • Interrelationship between poverty, economic development and the state of the natural environment • World Commission on Environment and Development 1987 Our Common Future

9. Aggregate modelling • Social planner • Discounting • Care less about consumption tomorrow than today,  > 0, pure rate of time preference, defective telescopic faculty (Pigou) • One believes tomorrow’s consumer will be better off than today’s

10. Perman et al.Chapter 3. Utilitarism • Utility discount rate ρ and consumption discount rate, r • Discounting discriminating against future generations? • Rising consumption over time may be consistent with positive discounting ECON 4925

11. Perman et al.Chapter 3 (11). • Derivation ECON 4925

12. Rules within resource economics • Two intertemporal allocation rules have attracted particular attention: the Hotelling rule and the Hartwick rule • The Hotelling rule: • No-arbitrage possibility condition that every efficient resource utilisation path has to meet. The net price of an exhaustible resource must grow at a rate that equal the interest rate ECON 4925

13. The Hartwick rule • Invest proceeds from resource extraction such that total capital is constant • The Hartwick result • The investment rule is necessary but not sufficient for constant sustainable consumption • The relevance of the Hartwick rule for sustainability • Must have substitution between natural capital and man-made capital ECON 4925

14. Further issues • Policy instruments to achieve optimality • Taxes • Distribution; taxing Ricardian rents • Markt forms • Monopoly • Free competition • Role of ownership for utilisation of common-pool renewable resources

15. Main types of models • Cake - eating model • limited amount of non-renewable resources • Hotelling’s rule • Limited non-renewable resources, production of man-made resources • Biological growth of renewable resources • Modelling the growth process • Role of steady state and sustainability • Necessary mathematical skills • Optimal control theory • Dynamic programming

16. The cake-eating model • A two –period model, consumption C of a finite resource during the two periods • Discounting of utility in period 2 with factor • Problem: when to eat the cake and how much • Solution • Hotelling’s rule

17. Generalisation to depletion on the interval to – t1 of a resource consuming Rt at time t • Introducing a consumption good produced using resources and capital

18. Biological growth of a renewable resource • Objective function: • Maximising present value of net utility of harvest of the resource, specifying e.g. a current variable cost function of harvesting