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49
Economics of Natural Resources
Resource Taxonomy
Resource Taxonomy
Reserves
Marginal
Para-
Sub - economic
Sub-Marginal
Figure 1
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Economics of Natural Resources
Resource endowment:
Identified resources:
specific bodies of mineral bearing material
whose location, quality and quantity are known
from geological evidence and supported by
engineering measurements.
Measured resources:
material for which quantity and quality estimated
are within a margin of error less than 20 percent,
from geologically well known sample sites
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Economics of Natural Resources
Indicated resources:
material of which quantity and quality have been
estimated partly from sample analyses and
partly from reasonable geological projections.
Undiscovered resources:
unspecified bodies of mineral bearing material
surmised to exist on the basis of broad
geological knowledge and theory
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Economics of Natural Resources
Hypothetical resources:
undiscovered materials reasonably expected to
exist in a known mining district under known
geological conditions.
Speculative resources:
undiscovered materials that may occur in either
known types of deposits in favorable geological
settings where no discoveries have been made
or in yet unknown types of deposits that remain
to be recognized.
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Economics of Natural Resources
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.
Examples include:
solar energy, water, cereal grains, forest,
fish, animals etc.
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Economics of Natural Resources
Lets derive the condition of dynamic efficiency with the help of simple
mathematics.
Lets assume that the demand curve for a depletable resource is linear and
stable over time.
Thus the inverse demand curve in year t can be written as
(1)
The total benefits extracting an amount qt in year t are then the integral of this
function,
(Total Benefits)t =
= (2)
Assume that the MC of extracting the resource is constant C and therefore the
total cost of extracting any amount qt in year t can be given by,
(3)
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Economics of Natural Resources
Lets derive the condition of dynamic efficiency with the help of simple
mathematics.
Lets assume that the demand curve for a depletable resource is linear and
stable over time.
Thus the inverse demand curve in year t can be written as
(1)
The total benefits extracting an amount qt in year t are then the integral of this
function,
(Total Benefits)t =
= (2)
Assume that the MC of extracting the resource is constant C and therefore the
total cost of extracting any amount qt in year t can be given by,
(3)
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Economics of Natural Resources
If the total available amount of this resource is , then the dynamic allocation
of a resource over n years is the one which satisfies the maximization
problem.
(4)
(5)
(6)
q1 + q2 = 20
The solution of the equations give the results:
q1 = 10.238, q2= 9.762, = $1.905.
(1)
(2)
Consider figure 2.
The total marginal cost of the first resource would rise
until it equaled that of the second resource at the time
of transition.
In the period of time prior to transition (T*) only the
cheapest resource would be consumed.
Two salient observations:
(1)The transition is smooth; total marginal cost never
jumps to a higher level.
(2)The rate of increase in total marginal cost slows
down after the time of transition.
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Economics of Natural Resources
Price or
Cost Total Marginal Cost1
(dollars
Total Marginal Cost2
per unit)
Time
0 T*
Figure:2
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Economics of Natural Resources
Property Rights:
Price
(dollars
per unit)
A=
Consumer
Surplus
P*
D
Quantity (units)
Qd
Figure - 3
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Economics of Natural Resources
Price
(dollars
per unit)
P*
B=
Producer
surplus
Quantity (units)
Qs
Figure - 4
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Economics of Natural Resources
The price level (in our example P*) which producers and consumers face will
adjust until supply equals demand as depicted in figure 5. Given the price,
consumers maximize their surplus, producers maximize their surplus and the
market clears.
Price
(dollars
per unit)
P*
D
Quantity (units)
Q*
Figure 5
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Economics of Natural Resources
Now, is this allocation efficient? the answer is
yes. Adopting the defining of static efficiency
(discussed above) it can be inferred that the net
benefit is maximized by market allocation and as
seen in Figure -5, it is equal to the sum of consumer
and producer surplus.
OPEN ACCESS
PRIVATE COMMON
PROPERTY PROPERTY
Limited User Unlimited User
Extraction
Extraction
Extraction Limited by Extraction Extraction
Limited by
Limitation Individual Unlimited Limited
Rules
Decision
Figure 6: A Trichotomy of Resource Use Regime
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Economics of Natural Resources
Common Property Regime: This refers to a property right regime
where the property is jointly owned and managed by a specific
group of co- owners. The non-members are excluded from use of
the property and the members use the property based on the
rules agreed upon among the members. The rules for controlling
common property may be imposed from outside too.
Benefits
and Costs
(dollars)
TC
TB
Quantity of
Harvesting Effort
0 Q1 Q2
(units)
Figure-7
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Economics of Natural Resources
Growth in
Fish Stock
(tons)
G(S*)
G(S0)
Benefits
and Costs
of Fishing
Effort
(dollars)
R(Ee)
C(Ee)
Quantity of Fishing
Effort (units)
0 Ee Em Ec
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Economics of Natural Resources
(a)the higher the discount rate, the higher the cost (in
terms of forgone current income) of maintaining any
given resource stock, and
Why?
With an infinite discount rate, allocation over time gives
rise to Marginal User Cost (MUC) which measures
opportunity cost. This implies that,
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Economics of Natural Resources
One of the condition of dynamic efficient allocation has to satisfy with infinite
discount rate is ,
p = c/qx,
where, p = constant price, c = constant marginal cost
per unit of effort and qx = no of fish harvested per unit
of effort.
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Economics of Natural Resources
=> py = ce
where, py is total benefits and ce is total cost implying
net benefits are zero.
We have found that static efficient sustained yield implies a larger fish
population that the maximum sustained yield.
But with the positive discount rate, dynamic efficient sustained yield would
imply a smaller fish population.
The likelihood of population being reduced below the level supplying the
maximum sustainable yield depends on discount rate.
In general the Lower the extraction cost and the higher the discount rate, the
more likely it is that the dynamic efficient level of effort will exceed the level of
effort associated with the maximum sustainable yield.
When MEC = 0, Static efficient sustainable yield = maximum sustainable yield.
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Economics of Natural Resources
R(Ee)
C(Ee)
Marginal
Revenue
Average Cost =
Marginal Cost
Consider the situation when property rights to the fish are not
well defined. For example the case of ocean fishery where
access to fishery is completely unrestricted. This is a situation of
open access.