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REM 621 Topic 12: Non-renewable Resources

REM 621 Topic 12: Non-renewable Resources. Topics in Non-renewable Resource Economics. Fixed supply and scarcity: the McKelvey Box Exploration and development: the Mayflower problem and the small/big/small pattern of discoveries (Norgard 1990)

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REM 621 Topic 12: Non-renewable Resources

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  1. REM 621 Topic 12: Non-renewable Resources

  2. Topics in Non-renewable Resource Economics • Fixed supply and scarcity: the McKelvey Box • Exploration and development: the Mayflower problem and the small/big/small pattern of discoveries (Norgard 1990) • Efficient management/depletion and the role dynamic analysis (multiple time periods) • Economic rent concepts (scarcity vs. differential rent) and the case of BC Coal development (Gunton 2004)

  3. Figure. A Simplified Illustration of the Effects of Prices on Petroleum Supply p2 p3 Exploration as a Function of Price (E(p1)) Production as a Function of Price (Q(p1)) Non-Commercial (at current prices) Commercial Producing Reservoirs p0 p1 p2

  4. Static efficiency "marginal willingness to pay (price) = marginal cost" Dynamic efficiency "use of resources (or amenities) over time that maximizes net present value" (also called dynamic optimization) NPV is maximized where the present value of the marginal net benefit in Period 1 equals the present value of the marginal net benefit in Period 2. Thus no re-allocation of use over time can increase NPV.

  5. Hotelling Rule “Non-renewable resources should be depleted in such a way that the rate of growth of the price (or 'net price') of the extracted resources should equal the discount rate” Marginal User Cost (Scarcity Rent, text p327) “Opportunity cost of consuming a unit now rather than in the future, since the resource is not in unlimited supply. Thus, holding units of the resource instead of consuming them permits benefits to appear later on. Also known as 'scarcity rent' or 'net price'.”

  6. Economic Rent Concepts P,MC P,MC S S P** Scarcity rent P* = MC* MC* Differential rent Differential rent q* q q* q

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