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Natural Resource Economics: An Overview

Natural Resource Economics: An Overview. 2 period model . MUC rises at rate of discount In period 2, MUC 1+r as large as in period 1 Suggests that efficiency involves rising MUC and falling Q Generalize to longer time periods. MUC.

emerson-heath
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Natural Resource Economics: An Overview

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  1. Natural Resource Economics:An Overview

  2. 2 period model • MUC rises at rate of discount • In period 2, MUC 1+r as large as in period 1 • Suggests that efficiency involves rising MUC and falling Q • Generalize to longer time periods

  3. MUC • In order for an owner of resource to be indifferent as to the period in which they sell, PV of the MUC must be the same in all periods. • This means that MUC of an exhaustible resource will increase with the discount rate.

  4. price equation • efficiency pricing: Pt = MECt +MUCt • where • MEC refers to Marginal Extraction Cost • MUC refers to Marginal User Cost

  5. MUC and MEC • The existence of MUC means that price will always be different from MEC. • MUC = P – MEC (net benefit) • MUC is a form of scarcity rent • If no scarcity, MUC = 0 • If scarcity, MUC = PV of marginal net benefit in each time period • If MEC = 0 • Competitive firm MUC = price = MB • Monopoly MUC = MR = MB

  6. social planner vs. monopolist • how does allocation differ with respect to planner? • “social planner”: maximize net benefit to society • monopoly: maximize profit (producer surplus)

  7. excel example:dynamically efficient extraction of an exhaustible resource • 100 tons of coal • 2 periods • MEC = 0 • Demand each period P = 500 – 0.5q • How will 100 tons be allocated over 2 periods?

  8. 2 ways to analyze • maximize social welfare (“benevolent social planner”): CS + PS • maximize PS: monopolist maxes PV profit

  9. using excel solver • enter equations • enter parameters • specify changing cells • specify objective cell

  10. constant MEC with no substitute

  11. MUC and Q over time • efficient MUC rises, reflecting increasing scarcity • in response, quantity extracted falls over time until reaching zero, when total MC = highest WTP • efficiency requires smooth transition to exhaustion of resource

  12. transition to a renewable substitute • backstop resource, available at constant MEC (e.g., solar) • when is it efficient to switch to backstop? • when cheaper to do so! • with no backstop, max WTP (“choke price”) sets limit on total MC • backstop’s MEC now sets upper limit

  13. switch point • prior to switch point, exhaustible resource is cheaper • at the switch point, MC of exhaustible resource (including MUC) rises to meet MC of substitute • consumption of renewable begins

  14. exploration and discovery • expensive • as more easily discovered resources are exhausted, search is less hospitable environs (bottom of ocean, deep within earth) • MC of exploration will rise over time

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