1. ECON 4925 Resource Economics Autumn 2010 Lecture 1 Introduction Lecturer: Finn R. Førsund 14925 Lecture 1

2. ECON 49252 Perman et al. Chapter 1.2.1 Classical economists: 1700-1800 century – Development of natural resource economics – Adam Smith, Thomas Malthus, David Ricardo, John Stuart Mill Economic growth: importance of natural resources (land) Living standards in the long run subject to constraints (land) Diminishing returns, inevitability of a stationary state

3. ECON 49253 Perman et al. Chapter 1.2.1 Adam Smith: markets and allocation of resources, invisible hand Malthus: population growth geometric and food output growth arithmetic Ricardo: subsistence wage level in steady state, land in varying quality John Stuart Mill: diminishing returns, but also growth of knowledge and technical progress. Amenity values, first environmental economist?

4. ECON 49254 Perman et al. Chapter 1.2.2 Neoclassical economics: marginal theory and value in exchange 1870+, Jevons, Menger, Marshall (consumer surplus), Walras (general equilibrium) Production- and utility functions Keynes: short-run use of resources Neoclassical growth theory: absence of natural resources, introduced from 1970+

5. ECON 49255 Perman et al. Chapter 1.2.3 Welfare economics Rankings of allocation must be based on ethical criterions Utilitarian moral philosophy, Hume, Bentham, Mill. Weighted average of the total utility levels enjoyed by all individuals in the society Pareto optimality (1897)

6. ECON 49256 Perman et al. Chapter 2 Can the global economic system continue to grow without undermining the natural systems, which are its ultimate foundation? Can poverty be alleviated in such ways that do not affect the natural environment in such a way that future economic prospects suffer – Interrelationship between poverty, economic development and the state of the natural environment – World Commission on Environment and Development 1987 Our Common Future

7. Issues in resource economics Types of resources – Non-renewables Minerals, oil, gas, coal – Renewables Fish, forests, water Questions to be studied – Optimal depletion of non-renewables – Optimal harvesting of renewables

8. Sustainability – Can the global economic system continue to grow without undermining the natural systems, which are its ultimate foundation? – Can poverty be alleviated in such ways that do not affect the natural environment in such a way that future economic prospects suffer – Interrelationship between poverty, economic development and the state of the natural environment – World Commission on Environment and Development 1987 Our Common Future

9. Aggregate modelling – Social planner Discounting – Care less about consumption tomorrow than today,  > 0, pure rate of time preference, defective telescopic faculty (Pigou) – One believes tomorrow’s consumer will be better off than today’s

10. ECON 492510 Perman et al. Chapter 3. Utilitarism Utility discount rate ρ and consumption discount rate, r Discounting discriminating against future generations? Rising consumption over time may be consistent with positive discounting

11. ECON 492511 Perman et al. Chapter 3 (11). Derivation

12. ECON 492512 Rules within resource economics Two intertemporal allocation rules have attracted particular attention: the Hotelling rule and the Hartwick rule The Hotelling rule: – No-arbitrage possibility condition that every efficient resource utilisation path has to meet. The net price of an exhaustible resource must grow at a rate that equal the interest rate

13. ECON 492513 The Hartwick rule – Invest proceeds from resource extraction such that total capital is constant The Hartwick result – The investment rule is necessary but not sufficient for constant sustainable consumption The relevance of the Hartwick rule for sustainability – Must have substitution between natural capital and man-made capital

14. Further issues Policy instruments to achieve optimality – Taxes – Distribution; taxing Ricardian rents Markt forms – Monopoly – Free competition Role of ownership for utilisation of common- pool renewable resources

15. Main types of models – Cake - eating model limited amount of non-renewable resources Hotelling’s rule – Limited non-renewable resources, production of man-made resources – Biological growth of renewable resources Modelling the growth process Role of steady state and sustainability Necessary mathematical skills – Optimal control theory – Dynamic programming

16. The cake-eating model A two –period model, consumption C of a finite resource during the two periods – Discounting of utility in period 2 with factor Problem: when to eat the cake and how much Solution Hotelling’s rule

17. Generalisation to depletion on the interval t o – t 1 of a resource consuming R t at time t Introducing a consumption good produced using resources and capital

18. Biological growth of a renewable resource Objective function: – Maximising present value of net utility of harvest of the resource, specifying e.g. a current variable cost function of harvesting