Resources_Dynamics

# Resources_Dynamics - Natural Resources and Dynamic Systems...

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Natural Resources and Dynamic Systems Contents: General Overview Key Terms and Components of Dynamic Systems Example of a Dynamic System Dynamic Models of Nonrenewable Resources Dynamic Efficiency: The Two Period Case General Overview Resource Economics addresses the allocation of natural resources over time, by using models of dynamic systems. A model is a collection of variables and parameters and the equations that show how the variables and parameters are related to one another. A system of equations is a model containing two or more interrelated equations. A dynamic system is a system that contains time as one of its variables. A dynamic system is a model that attempts to capture the important changes in, and changing interrelationships among, variables and parameters over time. We will use simple models of dynamic systems to study the inter-relationships among markets, natural resources, and the environment over time. The reason why it is important to do this is because there are some important types of market failure, that only show up over time in a dynamic system. But before we jump into modeling dynamic systems, let's review what we have done so far in this course from a modeling perspective. So far, we have conducted our analyses using static models. A model that addresses how variables interrelate at a single point in time is called a static model. In economics, we often use static models to examine a special point in time, namely the point in time during which an economic system is in equilibrium. These models are often called equilibrium models. The basic model of competitive supply and demand is an equilibrium model, because it predicts market price and market quantity when the market is in equilibrium. We have used static models to determine the market equilibrium of an economic system, to determine the socially optimal equilibrium of the economic system and then to compare the two equilibria. When the two equilibria did not coincide, we explored some of the policies that could be used to move the equilibrium from the inefficient market equilibrium to the socially optimal equilibrium. As we have seen, static models can be quite useful in determining equilibria, comparing equilibria, and suggesting ways to achieve a more efficient equilibrium. However, some types of market failure occur "between" equilibria, i.e., "on the way" from one equilibrium to the next. Resource economics uses models of dynamic systems to develop policies that can be used to correct such market failures, market failures that manifest themselves over time. Often, these market failures exist because private markets extract or harvest natural resources either too quickly or too slowly relative to the socially optimal rate of use.

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