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Econ 131 lecture 15

# Econ 131 lecture 15 - Schedule Today Natural Resources...

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Schedule Today: Natural Resources Chapter 6 Next Week: Fisheries Chapter 7 Monday, Nov. 21st TA Session 6:30-7:30pm Warren Lecture Hall 2005 (Problem set 5) Natural Resource Stocks (Renewable and Non-renewable) Keohane and Olmstead Chapter 6 Measuring the values of natural resource stocks Understand the externalities and market failures involved in their extraction

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Two-Period Model Static efficiency: maximize producer and consumer surplus in a single time and market Dynamic efficiency: consider the scarcity of the resource, maximize over multiple time periods The scarcity adds a cost to using the resource today: Less is available tomorrow Called the marginal “user cost” or “scarcity rent” Two-Period Model The equimarginal principle applies here too: Set marginal surplus equal in the two periods Caveat: Adjust for present value since the surpluses occur at different points in time Marginal surplus is MB (i.e. marginal consumer surplus) minus MC (i.e. marginal producer cost of extraction) Without discounting we want to set: MB 1 -MC 1 = MB 2 -MC 2 Discounting means set them equal in present value: PV(MB 1 -MC 1 ) = PV(MB 2 -MC 2 )
Algebra Static problem: Oil supply (marginal cost of extraction) = 1 Oil demand (marginal benefit of using it) = 10-Q Solve the static efficiency problem, i.e. supply=demand Algebra Two-period dynamic problem Suppose max supply = 9 (total resource stock) Solve for the efficient use of the resource in two time periods (this year and next year) if the discount rate is 0% Solve for the efficient use if the discount rate is 20%

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The Green Paradox Assume pollution (e.g. of CO2) is proportional to
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Econ 131 lecture 15 - Schedule Today Natural Resources...

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