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Unformatted text preview: EEP 101/ECON 125 EEP Lecture 15: Natural Resources (NR)
David Zilberman UC Berkeley Review of Renewable Vs. Non Renewable Review Nonrenewable resources (mineral, fossil water, remnants of ancient civilizations, old growth forest, “dead things”). forest, Renewable resources (fisheries, forests, grasslands, water systems, “living things”). water Many renewable resources and most nonrenewable Many ones are exhaustible. ones Analysis of dynamic systems Analysis Natural resource management is control and direction of dynamic Natural systems. Policies affect the evolution of populations and/or resource systems Policies inventories inventories The indicators of the situation of dynamic systems are state The variablesvariables Number of fish in a lake at a moment of time Volume of water in an aquifer Policy makers affect control variables Policy control Size of harvest Price of water Systems are affected by random shocks Weather Pest infestations Quantification of NR systems Quantification Measurement of dynamics systems is challenging Measurement counting fish is not easy NR resource systems may be heterogeneous trees and fish of different sizes, of different ages, and at different trees locations locations minerals of different qualities at varying locations The art of modeling identifies crucial features of the The system and integrates simplicity with realism system Models are approximations that are subject to error Models Equations of motion Equations 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 the EQUAL TO EQUAL today’s stock MINUS MINUS today’s harvest (or mining) PLUS resource stock growth (for renewable resource) PLUS new discoveries PLUS PLUS Applying Our Knowledge of Interest Rates Interest Higher interest rates lead to increased mining or Higher harvesting Resource owners that have to pay high interest for Resource 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 Poor likely to mine their resources likely Income & credit support for the poor reduce NR Income Net discounted present value (NPV) Net Discounting to time 0 is used for comparing income Discounting of different periods of The objective of resource management programs are The to maximize the sum of discounted values of all net benefits over time (Net Benefits of period 1, plus 2, plus 3, etc.) (Net Example: Computing NPV Example: If we have earned If 55 dollars at first period 55 60.5 dollars at period two 60.5 If the discount rate is 10% The NPV is 100 Dollars If (55/1.1=50, 60.5/(1.1*1.1)) (55/1.1=50, If interest rate is 20%the NPV is If 45.83 which is equal to 55/1.2 45.83 + 42.03 Which is equal to 60.55/(1.2*1.2) = 87.86 Higher interest rates reduce value of future earning Non renewable resources Non The actual stock of non renewable resources is declining over The actual declining time, but known reserves may increase because of discoveries known increase Perceived shortages and improved discovery technologies Perceived trigger searches and lead to discoveries trigger Known oil reserves are estimated to last 40-80 years, the same Known estimate was given in the 1940s estimate Still oil and natural gas reserves may run out Non renewable resources are rarely depleted, but may become Non too expensive to mine Factor determining extraction: demand Factor Demand is reflecting marginal value of resource in applications (value Demand of oil in transportation and heating) of Higher incomes and lower prices increase demand Demand increases with increased population Demand It may be reduced by introduction and adoption of resource It conserving technologies (fuel efficient cars) conserving It is reduced by back stop technologies (solar energy) Demand can be reduced by Taxes Taxes Population policies Population R&D R&D Other factors determining extraction Other 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) Generic Model Generic Marginal Mining cost. MNC(x) . Marginal future cost (User costs). MFC(x). The future cost represents loss of future opportunities by present extraction. represents Externality cost. MEC C =Optimal allocation A=Allocation under open access B=Allocation without considering externality costs Alternative Allocations Alternative 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 without still result in excessive mining (B) Competitive supply when ownership is well defined and Competitive pollution is taxed results in optimum (C) pollution Cartel may under provide resources (if price under Cartel monopoly is greater than at C) or under provide if pollution cost great than the cartel’s price increase. pollution Elements of a Resource Policy Elements (1) Establishing private prosperity for the resource. This prevents the open (1) Establishing This access problem and moves from point A to point B in Figure 1. access (2) Externality control. Including tax on the resource (leading to a transition (2) Externality Including tax from B to C). Gasoline tax in U.S. can from affect Climate change dynamics reduce air pollution reduce Resource taxes also lead to Resource adoption of resource efficient technologies adoption emergence of backstop technologies (recycling when appropriate) emergence backstop (3) Support to Backstop research (3) Support (4) Subsidy for adoption of resource efficient technologies( fuel efficient (4) Subsidy Renewable resources Renewable Growth provides a base for harvest without ultimate Growth depletion. depletion. Change of stock = Growth minus harvest Change minus At a Steady state (sustainable solution) At Growth = Harvest Growth There are many sustainable solutions, the one that There maximizes discounted net benefits is optimal maximizes We have steady state (harvest =growth) at B,M,C,X
B= low stock sustainable outcome C = High stock sustainable outcome M=Maximum Sustainable yield X=maximum Sustainable Stock M G g r o w t h O Resource Stock B Growth as function of stock Growth C X Alternative Sustainable Outcomes Alternative Extinction- no stock on growth X=maximum Sustainable Stock (All food goes for consumption not X=maximum growth) growth) M=Maximum 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 Extract first sustain later Extr The story U.S &Europe acti
on Alternative extraction strategies Alternative Time Conserve first sustain later Extrac Occurs in fisheries Occurs which are near extinction tion which Or in restoration efforts Time Major Contributors to extraction:
Demand, Open access,Extraction technology Demand, Resulting elements of Extraction control policy Reduction of demand taxes, subsidies to resource use reducing technologies establishing property rights requiring licenses to extract limiting harvesting season restricting size of equipment restricting restricting total harvesting capacity regulating externality caused by harvesting (By catch) Control of access Regulation of Extraction technology Regulation Multiple benefits of resources Multiple Resources (forests, wetlands, etc.) provide multiple services Resources (recreation, bio-diversity, etc.) (recreation, Harvesting reduces alternative environmental benefits One solution: taxation of harvested resources Alternatives: subsidies for conservation (not harvesting), debt Alternatives: for nature, payment for environmental services Marketing of environmental amenities (Ecotourism, bioprospecting, tropical nuts ) Intensification and conservation Intensification Agricultural intensifications (fertilizers,chemicals)Agricultural increases yield per acre and reduces utilized land and deforestation deforestation Aquaculture provides substitutes for fishing, but has its Aquaculture own environmental side effects (to be controlled) own Forest plantation reduces pressure on natural forest Husbandry of animals (rhinos) would reduce pressure for Husbandry tasks and other features of wild animals tasks Fishery Issues Fishery International water. There are international agreements and evolving “laws of the sea,” yet, open access problems continue evolving Monitoring problems. Countries establish transferable fishing permits. Monitoring and enforcement may limit their effectiveness permits. Regulation of timing. The size, number of boats and duration of fishing may be regulated. Limitations: fishing (i) It leads to overinvestment in equipment. (ii) Frozen fish are inferior to fresh ones. with fine mesh nets) have future and externality costs with Technology controls. Some techniques (use of explosive, fishing Aquaculture and marine culture. Provide alternative sources of
fish, but have externality costs fish, P0 Non renewable resource prices Non Prices are indicators of scarcity Prices of non renewable resources decline when known Prices resources grow faster than use resources Prices of most non renewable resources has decline Higher interest rates lead to lower prices at present and Higher higher future prices (they increase present mining) Higher mining cost increases prices but reduces price Higher changes over time changes 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 More mining under higher interest rates in earlier periods and less mining beyond t=t* less t=t Price Dynamics of Renewable Resources Price 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 Rate (as supply increases) (as Extraction cost factor dampens the other two Extraction Demand growth increases prices New resource sources tend to reduce prices Prices of most renewable resources have decline over time ...
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- Spring '09
- Environmental Economics