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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 interrelationships 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.
Key Terms and Components of Dynamic Systems
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 Fall '07
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