Natural Resource Economics: An Overview

1
Natural Resource EconomicsAn Overview
2
2 period model

• MUC rises at rate of discount
• In period 2, MUC 1r as large as in period 1
• Suggests that efficiency involves rising MUC and
  falling Q
• Generalize to longer time periods

3
MUC

• In order for an owner of resource to be
  indifferent as to the period in which they sell,
  PV of the MUC must be the same in all periods.
• This means that MUC of an exhaustible resource
  will increase with the discount rate.

4
price equation

• efficiency pricing
• Pt MECt MUCt
• where
• MEC refers to Marginal Extraction Cost
• MUC refers to Marginal User Cost

5
MUC and MEC

• The existence of MUC means that price will always
  be different from MEC.
• MUC P MEC (net benefit)
• MUC is a form of scarcity rent
• If no scarcity, MUC 0
• If scarcity, MUC PV of marginal net benefit in
  each time period
• If MEC 0
• Competitive firm MUC price MB
• Monopoly MUC MR MB

6
social planner vs. monopolist

• how does allocation differ with respect to
  planner?
• social planner maximize net benefit to society
• monopoly maximize profit (producer surplus)

7
excel exampledynamically efficient extraction
of an exhaustible resource

• 100 tons of coal
• 2 periods
• MEC 0
• Demand each period P 500 0.5q
• How will 100 tons be allocated over 2 periods?

8
2 ways to analyze

• maximize social welfare (benevolent social
  planner) CS PS
• maximize PS monopolist maxes PV profit

9
using excel solver

• enter equations
• enter parameters
• specify changing cells
• specify objective cell

10
constant MEC with no substitute
11
MUC and Q over time

• efficient MUC rises, reflecting increasing
  scarcity
• in response, quantity extracted falls over time
  until reaching zero, when total MC highest WTP
• efficiency requires smooth transition to
  exhaustion of resource

12
transition to a renewable substitute

• backstop resource, available at constant MEC
  (e.g., solar)
• when is it efficient to switch to backstop?
• when cheaper to do so!
• with no backstop, max WTP (choke price) sets
  limit on total MC
• backstops MEC now sets upper limit

13
switch point

• prior to switch point, exhaustible resource is
  cheaper
• at the switch point, MC of exhaustible resource
  (including MUC) rises to meet MC of substitute
• consumption of renewable begins

14
exploration and discovery

• expensive
• as more easily discovered resources are
  exhausted, search is less hospitable environs
  (bottom of ocean, deep within earth)
• MC of exploration will rise over time