Why study natural resource economics?

1. Why study natural resource economics? • The Self-Extinction Premise • A society can germinate the seeds to it’s own destruction. • Malthusian view – Pop. Growth can’t keep up with our use of… • Oil, fish, forests, fresh water, clean air • Examples • Easter Island – Reliance and overuse of trees led to downfall • Mayan civilization – Pop. Growth > Food Supply

2. Opposing Viewpoints Resources are scarce, but we will find substitutes or innovation will lead to more efficient use of the resource – “necessity is the mother of invention

3. Three statements History shows that when faced with scarcity, societies always correctly adapt to solve the problem. History gives no clues as to whether societies correctly adapt to solve problems of scarcity. History shows that when faced with scarcity, societies never adapt to solve the problem.  

4. Resource Taxonomy • Natural Resource – resources that occur in a natural state and are valuable for economic activity • Exhaustible, Non-renewable resources • Resources that are fixed in amount of the resource which may be used up over time. • Examplesinclude fossil fuels, minerals such as iron, silver, and gold. • Renewable resources • Resources that can be regenerated over time. • Examples, • Depletable – A renewable resource that can be exploited and depleted, such as soil and clean air.

5. Coal Exhaustable Depletable

6. Uranium Exhaustable Depletable

7. Clean Water Exhaustable Depletable

8. Forests Exhaustable Depletable

9. Private Goods Rivalrous Common Goods Fish, hunting game, grazing land Food, clothing, toys, cars Non-Excludable Excludable Satellite television, Golf courses, Cinemas National defense, lighthouses, clean air, information goods Public Goods Club Goods Non-Rivalrous

10. Questions… • How much rainforest do we really need? • I want to maximize wealth and societal welfare. • In order to figure that out, I need to know how many trees I should grow AND I need to know how much paper people use.

11. How much of a resource should we use? • Marginal Analysis – • Tool used to answer questions of ‘how much?’, by examining very small changes. • Benefits > Cost => Do more • Benefits < Cost => Do less • Examples, • Valuing the Resources • Economic value of the a tree • Anthropocentric view • Direct value of tree’s existence- can make a chair out of it • Indirect value – reducing carbon dioxide in air, protecting the environment from global warming, pretty and other like it

12. WTP Willingness to pay – max amount that we would spend on a good.

13. How much paper should we make? • Marginal Analysis – • Tool used to answer questions of ‘how much?’, by examining very small changes. • Benefits > Cost => Do more • Benefits < Cost => Do less

14. Your Demand for Paper WTP for Paper stacks p1 p2 Quantity of paper stacks. q1 q2

15. Total Benefit from q2 WTP for Paper stacks p1 p2 Quantity of paper stacks q1 q2

16. Opportunity Cost The benefit lost when specific environmental services are forgone in the conversion to the new use

17. Marginal Opp. Cost Curve Price of Paper Stacks p2 p1 Quantity of Paper Stacks q1 q2

18. Total Cost Price of Paper Stacks p2 p1 Quantity of Paper Stacks q1 q2

19. Net Benefits Price of Paper Stacks p1 p2 Quantity of Paper Stacks q1 q1 q2 q2

20. Net Benefits Price of Paper Stacks p1 p2 Quantity of Paper Stacks q1 q1 q2 q2

21. Max. Net Benefit from Paper Price of Paper Stacks Marginal Cost Equilibrium Price Marginal Benefit Quantity of Paper Stacks Equilibrium Quantity

22. Marginal Analysis • First Equimarginal Principle – • Net benefits are maximized when the marginal benefits from an allocation equal the marginal costs • Efficient • Max. Net Benefits

23. Problems • One convenient way to express WTP between price and quantity is through the inverse demand function. In an inverse demand function, the price consumers are willing to pay is expressed as a function of the quantity available for sale. Suppose the inverse demand function of a product is • P=80-q • And the marginal cost of producing the product is • MC=1q • A) How much would be supplied in a static efficient allocation? • B) What would be the magnitude of the net benefits?

24. Static Model • Time does not matter • Cost/Benefit Analysis – cutting down trees • Benefit > Cost => support action • Cost > Benefit => oppose action • Dynamic Model • Account for time • Cost/Benefit Analysis accounting for time • Max [B0, B1, B2] • Present Value – $1 invested today at 10% interested yields $1.10 a year from now. • Present Value (PV) of X one year from now is X/(1+r)2 • r is the interest rate (discount rate) • PV[Bn]=Bn/(1+r)n • PV[B0, B1, B2]= B0/(1+r)4 + B1/(1+r)3 +B2/(1+r)2

25. Market Equilibrium Price of Good Supply Equilibrium Price Demand Quantity of Good Equilibrium Quantity

26. Well-Defined Property Rights • Exclusivity – • All benefits and costs accrued as a result of owning and using the resources should accrue to the owner, and only the owner, either directly or indirectly by sale to others • Transferbility – • All property rights should be transferable from one owner to another in a voluntary exchange • Enforceability – • Property rights should be secure from involuntary seizure or encroachment by others (ie. eminent domain)

27. Equilibrium = Best We Can Do Price of Good Supply Equilibrium Price Demand Quantity of Good Equilibrium Quantity

28. Consumer Surplus Price of Good Supply Equilibrium Price Demand Quantity of Good Equilibrium Quantity

29. Producer Surplus Price of Good Supply Equilibrium Price Demand Quantity of Good Equilibrium Quantity

30. Total Welfare Price of Good Supply Equilibrium Price Demand Quantity of Good Equilibrium Quantity

31. For next time, Homework #1 due