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Chapter 6

Chapter 6. The Allocation of Depletable and Renewable Resources: An Overview. Contents:. 7.1 Introduction 7.2 A Resource Taxonomy 7.3 Efficient Intertemporal Allocation 7.4 Market Allocation 7.5 Summary. 7.1 Introduction. Main contents in chapter 7:

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Chapter 6

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  1. Chapter 6 The Allocation of Depletable and Renewable Resources: An Overview

  2. Contents: • 7.1 Introduction • 7.2 A Resource Taxonomy • 7.3 Efficient Intertemporal Allocation • 7.4 Market Allocation • 7.5 Summary

  3. 7.1 Introduction • Main contents in chapter 7: • Defining and discussing a simple but useful resource taxonomy ( classification system ), as well as explaining the dangers of ignoring the distinctions made by this taxonomy. • Defining an efficient allocation of an exhaustible resource over time when no renewable substitute in available.

  4. 7.1 Introduction • Main contents in chapter 7: • Characterize efficient extraction paths for renewable and depletable resources, assuming that they are perfect substitutes, and how these efficient paths are affected by changes in the nature of the cost function. • Analyzing whether or not the market is capable of yielding a dynamically efficient allocation in the presence or absence of a renewable substitute.

  5. 7.2 A Resource Taxonomy • Three separate concepts are used to classify the stock of depletable resources: • Current reserves: defined as known resources that can profitably be extracted at current prices. • Potential reserves: defined as a function rather than a number. The amount of reserves potentially available depends upon the price people are willing to pay. • Resource endowment: represents the natural occurrence of resource in the earth’s curst.

  6. 7.2 A Resource Taxonomy • Other distinctions among resource categories are also useful: • Depletable resources: are one for which the natural replenishment feedback loop can safely be ignored. • Renewable resources: are differentiated from depletable resources primarily by the fact that natural replenishment augments the flow of renewable resources at a non-negligible rate.

  7. 7.3 Efficient Intertemporal Allocation • 7.3.1 The Two-Period Model Revisited • 7.3.2 The N- Period Constant-Cost Case • 7.3.3 Transition to a Renewable Substitute • 7.3.4 Increasing Marginal Exaction Cost • 7.3.5 Exploration and Technological Progress

  8. 7.3.1 The Two-Period Model Revisited • In summary, two-period model suggests that an efficient allocation of a finite resource with a constant marginal cost of extraction involves rising marginal user cost and falling quantities consumed.

  9. 7.3.2 The N-Period Constant-Cost Case • Assumption: • Depletable resource with no substitute: MC=2, Q=40, r=0.1 • Demand function: P=8-0.4q • N-period

  10. NB! • First of all, in this case as in the two-period case, the efficient marginal user cost rises steadily in spite of the fact that the marginal cost of extraction remains constant. This rise in the efficient marginal user cost reflects increasing scarcity and the accompanying rise in the opportunity cost of current consumption.

  11. NB! • In response to these rising costs over time, the quantity extracted falls over time until it finally goes to zero. Thus, even there is no increase in the cost of extraction, an efficient allocation envisions a smooth transition to the exhaustion of a resource.

  12. 7.3.3 Transition to a Renewable Substitute • Assumption: • depletable resource: Q=40，MC=2，r=0.1 • Substitute renewable resource: MC=6 • Demand function: P=8-0.4(Qt+Qst)

  13. NB! • In this efficient allocation, the transition is once again smooth. • The depletable resource would be exhausted sooner than it would have been without the renewable resource substitute.

  14. 7.3.4 Increasing Marginal Extraction Cost • Assumption: • Depletable resource with substitute renewable resource • Marginal cost of extracting the depletable resource rises with the cumulative amount extracted

  15. Compare Analysis:

  16. 7.3.5 Exploration and Technological Progress • Exploration of new resources • Technological progress

  17. 7.4 Market Allocation • We have examined in detail how the efficient allocation of substitutable, depletable, and renewable resources over time would be defined in a variety of circumstances. Can actual markets be expected to produce an efficient allocation?

  18. 7.4 Market Allocation • As long as social and private discount rates coincide, property right structures are well defined, and reliable information about future prices is available, the markets in which those resources are bought and sold will lead to efficient allocation.

  19. 7.4 Market Allocation • Two different effects of environmental cost: • On the demand side • On the supply side • Which effect dominates ----- the demand effect of the supply effect?

  20. Objectives & Requirements: • Grasp the resource taxonomy • Understand the N-period model in different conditions and their implication

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