EEP 101/ECON 125 Lecture 15: Natural Resources (NR)

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EEP 101/ECON 125Lecture 15Natural Resources
(NR)

• David Zilberman
• UC Berkeley

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Review of Renewable Vs. Non Renewable

• Nonrenewable resources (mineral, fossil water,
  remnants of ancient civilizations, old growth
  forest, dead things).
• Renewable resources (fisheries, forests,
  grasslands, water systems, living things).
• Many renewable resources and most nonrenewable
  ones are exhaustible.

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Analysis of dynamic systems

• Natural resource management is control and
  direction of dynamic systems. Policies affect the
  evolution of populations and/or resource
  inventories
• The indicators of the situation of dynamic
  systems are state variables-
• Number of fish in a lake at a moment of time
• Volume of water in an aquifer
• Policy makers affect control variables
• Size of harvest
• Price of water
• Systems are affected by random shocks
• Weather
• Pest infestations

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Quantification of NR systems

• Measurement of dynamics systems is challenging
• counting fish is not easy
• NR resource systems may be heterogeneous
• trees and fish of different sizes, of different
  ages, and at different locations
• minerals of different qualities at varying
  locations
• The art of modeling identifies crucial features
  of the system and integrates simplicity with
  realism
• Models are approximations that are subject to
  error

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Equations of motion

• Depict the evolution of state variables over time
• How the stock of oil or number of fish change
• Stock size today is
• the resource stock of tomorrow is
• EQUAL TO
• todays stock
• MINUS
• todays harvest (or mining)
• PLUS
• resource stock growth (for renewable resource)
• PLUS
• new discoveries
• PLUS
• recycling

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Applying Our Knowledge of Interest Rates

• Higher interest rates lead to increased mining or
  harvesting
• Resource owners that have to pay high interest
  for funds are more likely to mine resources
  sell them than resource owners who face low
  interest rates
• Poor individuals with heavy credit constraints
  are more likely to mine their resources
• Income credit support for the poor reduce NR
  mining

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Non renewable resources

• The actual stock of non renewable resources is
  declining over time, but known reserves may
  increase because of discoveries
• Perceived shortages and improved discovery
  technologies trigger searches and lead to
  discoveries
• Known oil reserves are estimated to last 40-80
  years, the same estimate was given in the 1940s
• Still oil and natural gas reserves may run out
• Non renewable resources are rarely depleted, but
  may become too expensive to mine

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Factor determining extraction demand

• Demand is reflecting marginal value of resource
  in applications (value of oil in transportation
  and heating)
• Higher incomes and lower prices increase demand
• Demand increases with increased population
• It may be reduced by introduction and adoption of
  resource conserving technologies (fuel efficient
  cars)
• It is reduced by back stop technologies (solar
  energy)
• Demand can be reduced by
• Taxes
• Population policies
• RD

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Other factors determining extraction

• Extraction cost- reduced mining or harvesting
  cost or improved infrastructure (roads) increase
  extraction
• Recycling- alternative supply sources reduce
  extraction
• Known Reserves (more reserves increase
  extraction)
• Market structure
• Cartels extract less than competitive producers
• Open access result in excessive mining
• Regulation and policies
• Technology control (restriction on use of
  explosives)
• Zoning ( do not drill in Alaska)

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Generic Model

• Marginal Mining cost. MNC(x) .
• Marginal future cost (User costs). MFC(x). The
  future cost represents loss of future
  opportunities by present extraction.
• Externality cost. MEC

C Optimal allocation AAllocation under open
access BAllocation without considering
externality costs
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Alternative Allocations

• Open access and no regulation will result in
  excessive resource use (A- Pollution future
  ignored)
• Competitive supply by firms with well defined
  resources, ownership rights without pollution
  control still result in excessive mining (B)
• Competitive supply when ownership is well defined
  and pollution is taxed results in optimum (C)
• Cartel may under provide resources (if price
  under monopoly is greater than at C) or under
  provide if pollution cost great than the cartels
  price increase.

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Elements of a Resource Policy

• (1) Establishing private prosperity for the
  resource. This prevents the open access problem
  and moves from point A to point B in Figure 1.
• (2) Externality control. Including tax on the
  resource (leading to a transition from B to C).
  Gasoline tax in U.S. can
• affect Climate change dynamics
• reduce air pollution
• Resource taxes also lead to
• adoption of resource efficient technologies
• emergence of backstop technologies (recycling
  when appropriate)
• (3) Support to Backstop research
• (4) Subsidy for adoption of resource efficient
  technologies( fuel efficient cars,public
  transport)

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Renewable resources

• Growth provides a base for harvest without
  ultimate depletion.
• Change of stock Growth minus harvest
• At a Steady state (sustainable solution)
  Growth Harvest
• There are many sustainable solutions, the one
  that maximizes discounted net benefits is optimal

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Resource dynamics

• Stresource stock time t
• Xtextraction
• g(St)growth. Growth formulas vary
• Proportional growth g(St)?St
• Fixed growth g(St)Constant
• With non renewable resources g(St)0 once all the
  stock has discovered.
• Equation of motion
• Change in stock St1-St g(St) -Xt
• Steady State St1-St0 harvesting equals
  growth

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Not all steady states are alike

• Steady states outcomes are sustainable- but some
  sustain low stock levels and other largfe stocks
• Steady states analysis aims to stabilize outcomes
  providing the same levels of output or resoruces
  over long periods of time.But things change,
  evolve.
• It is useful to investigate when steady states
  will persist and study how chagens of conditions
  affect steady states.

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Fishery dynamics-fast growth.1
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Fishery dynamics-slow growth.05
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Steady state-fast growth.1
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Wait and grow
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Alternative strategies

• There are variable strategies of resource
  management-and many steady states
• Optimal one depends on
• objective function
• interest rate and outpur prices
• growth equation
• Extraction cost
• If Objective to maximize net present value higher
  interest rate lead to higher extraction
• In extraction cost decline with stock-optimal
  steady state has larger stock

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Growth as function of stock

• We have steady state (harvest growth) at B,M,C,X

B low stock sustainable outcome
C High stock sustainable outcome
MMaximum Sustainable yield Xmaximum Sustainable
Stock

M
G growth
B
C
O
X
Resource Stock
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Alternative Sustainable Outcomes

• Extinction- no stock on growth
• Xmaximum Sustainable Stock (All food goes for
  consumption not growth)
• MMaximum Sustainable yield (Between O and X)
• B low stock sustainable outcome (Between O M)
• C High stock sustainable outcome (Between M X)
• Maximum Sustainable yield is not necessarily
  optimal
• Higher stocks reduce harvesting costs
• Lower stocks allow more extraction

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Alternative extraction strategies

• Extract first sustain later
• The story U.S Europe
• Conserve first sustain later
• Occurs in fisheries
  which are near extinction
• Or in restoration efforts

Extraction
Time
Extraction
Time
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Open access may lead to over extraction

• Competition and open access lead to over
  extraction- the tragedy of the commons
• Therefore extraction needs to be regulated
• Many polices are used to regualte harvesting some
  are better than others
• Optimal regulation is by incentive or tradable
  trading that leads to maximize net present value
  subject to constraint

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Major Contributors to extraction Demand, Open
access,Extraction technology

• Extraction is affected by policies
• Policies can reduce demand and thus extraction
• taxes, subsidies to resource use reducing
  technologies
• Policies to reduce extraction by control of
  access
• establishing property rights
• requiring licenses to extract
• limiting harvesting season
• Extraction control by regulating technology
• restricting size of equipment
• restricting total harvesting capacity
• regulating externality caused by harvesting (By
  catch)

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Multiple benefits of resources

• Resources (forests, wetlands, etc.) provide
  multiple services (recreation, bio-diversity,
  etc.)
• Harvesting reduces alternative environmental
  benefits
• One solution taxation of harvested resources
• Alternatives subsidies for conservation (not
  harvesting), debt for nature, payment for
  environmental services
• Marketing of environmental amenities (Ecotourism,
  bio-prospecting, tropical nuts )

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Intensification and conservation

• Agricultural intensifications (fertilizers,chemica
  ls)- increases yield per acre and reduces
  utilized land and deforestation
• Aquaculture provides substitutes for fishing, but
  has its own environmental side effects (to be
  controlled)
• Forest plantation reduces pressure on natural
  forest
• Husbandry of animals (rhinos) would reduce
  pressure for tasks and other features of wild
  animals

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Fishery Issues

• International water. There are international
  agreements and evolving laws of the sea, yet,
  open access problems continue
• Monitoring problems. Countries establish
  transferable fishing permits. Monitoring and
  enforcement may limit their effectiveness
• Regulation of timing. The size, number of boats
  and duration of fishing may be regulated.
  Limitations
• (i) It leads to overinvestment in equipment.
• (ii) Frozen fish are inferior to fresh ones.
• Technology controls. Some techniques (use of
  explosive, fishing with fine mesh nets) have
  future and externality costs
• Aquaculture and marine culture. Provide
  alternative sources of fish, but have externality
  costs

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Non renewable resource prices

• Prices are indicators of scarcity
• Prices of non renewable resources decline when
  known resources grow faster than use
• Prices of most non renewable resources has
  decline
• Higher interest rates lead to lower prices at
  present and higher future prices (they increase
  present mining)
• Higher mining cost increases prices but reduces
  price changes over time

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Optimal price of resource over time with zero
extraction cost
Higher interest rate reduces initial price
BUT Increased rate of price changes when stock
is constant
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More mining under higher interest rates in
earlier periods and less mining beyond tt
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Price Dynamics of Renewable Resources

• The rate of the price change is affected by
• The discount rate tends to increase price over
  time.
• Rate of resource population growth tends to
  reduce price over time (as supply increases)
• Extraction cost factor dampens the other two
• Demand growth increases prices
• New resource sources tend to reduce prices
• Prices of most renewable resources have decline
  over time

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Stock pollution

• Some pollution problems are dynamic in nature
• Climate change
• Ground water quality
• The stock may be provide negative value
• Without intervention competitive market leads to
  accumulation of pollution
• Polices can affect dynamics
• Reduce build up of stock of pollution
• Lead to more desirable steady state
• Policies may affect prices of outputs and inputs
  and distribution between groups and generations
• Market structure and interest rate will affect
  optimal policy