Chapter 15 Natural Resource and Energy Economics McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives Falling birth rates Sources of energy Running out of oil vs. running out of energy Resource conservation Property rights 15-2

Resource Supplies Will the world run out of natural resources? –World population 6.6 billion –Standard of living 12 times higher than 1800 –Growing demand for natural resources 15-3

Population Growth Thomas Malthus 1798 –Living standards remain at subsistence level –Population continues to grow Higher living standards have produced lower birth rates –Replacement rate –Total fertility rate 15-4

Total Fertility Rates 2007 CountryTotal Fertility Rate Australia1.76 Canada1.61 China1.75 France1.98 Germany1.40 Hong Kong0.98 Italy1.29 Japan1.23 Russia1.39 South Korea1.28 Sweden1.66 United States

Population Growth Demographers –Population to peak at 9 billion Historically: –Death rates fall with modernization –Population explodes –Fertility rate eventually falls below replacement rate –Children as economic assets vs. liabilities 15-6

Resource Consumption Commodity demand rising the last 150 years –Population growth –Rising consumption per person Commodity supply rising faster Declining real commodity prices Will this trend continue? 15-7

Resource Consumption Resource consumption per person leveled off in richest countries –Water use –Energy use –Trash generated Resource demand will increase as more countries modernize 15-8

Energy Economics Dealing with energy scarcity Rising U.S. inflation adjusted GDP per 1 million BTU’s –Energy efficiency Will the world run out of energy? –Run out of oil, or cheap energy –Alternative sources –Externalities 15-9

Sources of Energy U.S. electricity sources 2006 –Coal 49% –Nuclear 19.4% –Natural gas 20% –Hydroelectric 7% –Renewables 2.4% –Petroleum 1.6% –Other 0.6% 15-10

Alternative Energy Sources Economic viability of alternative fuels Oil price at which alternative becomes viable –Biodiesel $80 –U.S. corn based ethanol $60 –Shale oil $50 –Tar sands, Brazilian ethanol $40 –Conventional oil $

Natural Resource Economics Policies for extracting resources to maximize net benefits Present vs. future consumption –Present value Renewable resources Nonrenewable resources 15-12

Nonrenewable Resources Oil, coal, and metals Extraction strategy to maximize stream of profits User cost –Sell today, cannot sell in the future Higher expected demand encourages less extraction today –Property rights 15-13

Renewable Resources Forests and wildlife Well structured property rights encourage sustainable use Optimal forest harvesting –30% of world land area –Variation in growth rates –Differences in property rights 15-14

Renewable Resources Optimal fisheries management –Fishery identified by location and species –Difficult to establish property rights –Overfishing encouraged –Policies to limit catch size –Total allowable catch –Individual transferable quota 15-15

Economic Growth and the Environment Is growth bad for the environment? Richer countries produce and consume more Richer countries spend more to maintain the environment Environmental Performance Index (EPI) –Richer countries have higher scores 15-16

Key Terms replacement rate total fertility rate demographers British thermal unit (BTU) net benefits renewable natural resource nonrenewable natural resource present value user cost extraction cost conflict diamonds fishery fishery collapse total allowable catch (TAC) individual transferable quota (ITQ) 15-17

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