Why study natural resource economics? The Self-Extinction Premise A society can germinate the seeds to it’s own destruction. Malthusian view – Pop. Growth can’t keep up with our use of… Oil, fish, forests, fresh water, clean air Examples Easter Island – Reliance and overuse of trees led to downfall Mayan civilization – Pop. Growth > Food Supply

Opposing Viewpoints Resources are scarce, but we will find substitutes or innovation will lead to more efficient use of the resource – “necessity is the mother of invention

Which of the following statements is the most correct?   History shows that when faced with scarcity, societies always correctly adapt to solve the problem. History gives no clues as to whether societies correctly adapt to solve problems of scarcity. History shows that, when faced with scarcity, societies can correctly adapt to solve the problem. History shows that when faced with scarcity, societies never adapt to solve the problem.  

Resource Taxonomy Natural Resource – resources that occur in a natural state and are valuable for economic activity Exhaustible, depletable, non-renewable resources Resources that are fixed in amount of the resource which may be used up over time. Examples, Renewable resources Resources that can be regenerated over time.

Coal Renewable Depletable

Wind Renewable Depletable

Uranium Renewable Depletable

Water Renewable Depletable Lake Michigan, Aquifer

Flow vs. Stock Resource Stock Resource Flows Resources that are fixed in amount Resource Flows Resources that do not exist as a stock, are not regenerative, provide a never ending flow of services. Examples,

How much of a resource should we use? Marginal Analysis – Tool used to answer questions of ‘how much?’, by examining very small changes. Benefits > Cost => Do more Benefits < Cost => Do less Examples, Valuing the Resources Economic value of the a tree Anthropocentric view Direct value of tree’s existence- can make a chair out of it Indirect value – reducing carbon dioxide in air, protecting the environment from global warming, pretty and other like it

How many chairs should we make? Marginal Analysis – Tool used to answer questions of ‘how much?’, by examining very small changes. Benefits > Cost => Do more Benefits < Cost => Do less

Your Demand for Wooden Chairs Price of wooden chairs p1 p2 Quantity of wooden chairs q1 q2

Total Willingness to Pay Price of wooden chairs p1 p2 Quantity of wooden chairs q1 q2

Opportunity Cost – The benefit lost when specific environmental services are forgone in the conversion to the new use Wooden Chair vs. Existence of Tree

Marginal Opp. Cost Curve Price of Wooden Chairs p2 p1 Quantity of Wooden Chairs q1 q2

Total Cost Price of Wooden Chairs p2 p1 Quantity of Wooden Chairs q1

Net Benefits Price of wooden chairs p1 p2 Quantity of wooden chairs q1

Net Benefits Price of wooden chairs p1 p2 Quantity of wooden chairs q1

Max. Net Benefit from Chairs Price of Wooden Chairs Marginal Cost Equilibrium Price Marginal Benefit Quantity of Wooden Chairs Equilibrium Quantity

Marginal Analysis First Equimarginal Principle – Optimality – Net benefits are maximized when the marginal benefits from an allocation equal the marginal costs Efficient Optimality – allocations are optimal if no other feasible allocation could benefit at least one person without any deleterious effects on some other person

Problems One convenient way to express WTP between price and quantity is through the inverse demand function. In an inverse demand function, the price consumers are willing to pay is expressed as a function of the quantity available for sale. Suppose the inverse demand function of a product is P=80-q And the marginal cost of producing the product is MC=1q A) How much would be supplied in a static efficient allocation? B) What would be the magnitude of the net benefits?

Problems Assume a change in the quality of a good results in an increase in consumers’ willingness to pay. Illustrate this situation graphically.

Static Model Dynamic Model Time does not matter Cost/Benefit Analysis – cutting down trees Benefit > Cost => support action Cost > Benefit => oppose action Dynamic Model Account for time Cost/Benefit Analysis accounting for time Max [B0, B1, B2] Present Value – $1 invested today at 10% interested yields $1.10 a year from now. Present Value (PV) of X one year from now is X/(1+r)2 r is the interest rate (discount rate) PV[Bn]=Bn/(1+r)n PV[B0, B1, B2]= B0/(1+r)4 + B1/(1+r)3 +B2/(1+r)2

Market Equilibrium Price of Good Supply Equilibrium Price Demand Quantity of Good Equilibrium Quantity

Well-Defined Property Rights Exclusivity – All benefits and costs accrued as a result of owning and using the resources should accrue to the owner, and only the owner, either directly or indirectly by sale to others Transferbility – All property rights should be transferable from one owner to another in a voluntary exchange Enforceability – Property rights should be secure from involuntary seizure or encroachment by others (ie. eminent domain) Note – Eminent domain is the inherent power of the state to seize a citizen's private property, expropriate property, or seize a citizen's rights in property with due monetary compensation, but without the owner's consent. Example, Haiti & Dominican Republic

Equilibrium = Best We Can Do Price of Good Supply Equilibrium Price Demand Quantity of Good Equilibrium Quantity

Consumer Surplus Price of Good Supply Equilibrium Price Demand Quantity of Good Equilibrium Quantity

Producer Surplus Price of Good Supply Equilibrium Price Demand Quantity of Good Equilibrium Quantity

Total Welfare Price of Good Supply Equilibrium Price Demand Quantity of Good Equilibrium Quantity

Defining Goods Common Goods – rivalrous, non-excludable Public Goods – non-rivalrous, non-excludable