Upcoming in Class

1. Upcoming in Class Homework #6 Due Oct. 25 Quiz #3 Oct. 27th Writing Assignment Due Oct. 27th Exam #3 Thursday Nov. 3rd

2. Homework #6 • Explain why we will likely never “run out” of a non-renewable resource such as oil. Does this also imply that we will always be able to extract all the oil we need? Explain.

3. Homework #6 • What has been the general trend in non-renewable resource prices in the past several decades? What has generally been responsible for this trend? Is this trend consistent with Hotelling’s rule? Discuss.

4. Chapter 12 – Non-renewable Resources Physical supply - available reserves measured in physical terms without regard for cost and value Economics supply – the amount of a resource that is available based on current prices and technology

5. Classification of Nonrenewable Resource

6. Reserves Identified reserves – the identified quantity of a resources; includes both economic and subeconomic reserves Indicated or inferred – resources that have been identified but whose exact quantity is not known with certainty

7. Undiscovered Reserves Hypothetical – the quantity of a resource not identified with certainty but hypothesized to exist Speculative – the location and quantity of a resource has not been identified but is hypothesized to exist

8. Resource lifetime Subeconomic resources – resources whose costs of extraction are too high to make production worthwhile Economic reserves – resources of high enough quality to be profitably produced and are identified

9. Resources • Changes to reserves • The resources is extracted and used => diminished reserves • New resource deposits are discovered => increasing reserves • Changing price and technology can make more or less of the known reserves economically viable

10. “Limits to Growth” • http://en.wikipedia.org/wiki/The_Limits_to_Growth • Written in 1972, predicting over use of resources • http://en.wikipedia.org/wiki/The_Population_Bomb • Written in 1968, predicting a population crash due to resource scarcity • The wager : http://en.wikipedia.org/wiki/Simon%E2%80%93Ehrlich_wager

11. Resource Rent for the Competitive Firm

12. Optimal extraction R=P-MC PV [R] = R0 + R1/(1+r) + R2/(1+r)2 +… Optimal extraction quantity R0 = R1/(1+r) = R2/(1+r)2 =… Hotelling’s Rule - net price rises over time with the rate of interest.

13. FIGURE 7.2 (a) Constant Marginal Extraction Cost with No Substitute Resource: Quantity Profile. (b) Constant Marginal Extraction Cost with No Substitute Resource: Marginal Cost Profile

14. Exhaustion of a Mineral Stock

15. Resource Extraction Choke price – the minimum price of a good or service that would result in a zero quantity demanded Price path – the price of a resource over time Extraction path – the extraction rate of a resource over time

16. Increasing Marginal Extraction Cost • For this case, the marginal user cost declines over time and reaches zero at the transition point. • The resource reserve is not exhausted. • The marginal cost of exploration can be expected to rise over time as well. • Successful exploration would cause a smaller and slower decline in consumption while dampening the rise in total marginal cost.

17. FIGURE 7.6 (a) Increasing Marginal Extraction Cost with Substitute Resource in the Presence of Environmental Costs: Quantity Profile. (b) Increasing Marginal Extraction Cost with Substitute Resource in the Presence of Environmental Costs: Price Profile (Solid Line—without Environmental Costs; Dashed Line—with Environmental Costs)

18. Hypothetical Nonrenewableresource Use Profile

19. Price Trends for Selected Minerals

20. Marginal Cost of Extraction Technology Decreases marginal cost of extraction Higher quality resources will be extracted first. => subeconomic resources may become economic when the price rises or technology improves

21. Change in World ReserveBase for Selected Minerals

22. Exploration and Technological Progress • Technological progress would also reduce the cost of extraction. • Lowering the future marginal cost of extraction would move the transition time further into the future. • Total marginal cost could actually fall with large advances in technology.

23. Distribution of Mineral Ores in the Earth's Crust (uneven distribution)

24. FIGURE 7.4 The Transition from One Constant-Cost Depletable Resource to Another

25. Transition to a DepletableSubstitute • The transition can for two depletables with different marginal costs will also be a smooth one. • The rate of increase of total marginal cost slows down after the time of transition because the marginal user cost represents a smaller portion of total marginal cost for the second, higher cost resource.

26. Transition to a Renewable Substitute • An efficient allocation thus implies a smooth transition to exhaustion and/or to a renewable substitute. • The transition point to the renewable substitute is called the switch point. • At the switch point the total marginal cost of the depletable resource equals the marginal cost of the substitute.

27. (a) Constant Marginal Extraction Cost with Substitute Resource: Quantity Profile. (b) Constant Marginal Extraction Cost with Substitute Resource: Marginal Cost Profile