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Generalised Resource Scarcity We have to make choices urgently.

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Presentation on theme: "Generalised Resource Scarcity We have to make choices urgently."— Presentation transcript:

1 Generalised Resource Scarcity We have to make choices urgently.

2 1908: The National Conservation Commission – growing concern of scarcity1908: The National Conservation Commission – growing concern of scarcity No stable population in immediate future – further ↑ in scarcity – especially in industrialised countries where per capita income is highNo stable population in immediate future – further ↑ in scarcity – especially in industrialised countries where per capita income is high Automatic market correctionsAutomatic market corrections Market & public policy imperfectionsMarket & public policy imperfections Rising demand - mines / wells exhaustedRising demand - mines / wells exhausted Is this going to continue?..?...? Or is it an isolated pattern?Is this going to continue?..?...? Or is it an isolated pattern? Desirability & inevitability of future economic growth – a larger debateDesirability & inevitability of future economic growth – a larger debate

3 Should we worry?Should we worry? Scarcity will affect quality of our lives – future generations will be affected tooScarcity will affect quality of our lives – future generations will be affected too There are 3 alternatives that defuse the pressures on environment assets that are caused by growth in population & income:There are 3 alternatives that defuse the pressures on environment assets that are caused by growth in population & income: –Role of exploration & discovery –Technical progress –Substitution for scarce resources by abundant ones

4  Exploration & Discovery: Will explore until marginal discovery cost = marginal scarcity rent (MSR)Will explore until marginal discovery cost = marginal scarcity rent (MSR) MSR is difference between price received & marginal cost of extraction = marginal benefitMSR is difference between price received & marginal cost of extraction = marginal benefit  Technological progress: Reduces cost by finding new ways to extract, process & use the oreReduces cost by finding new ways to extract, process & use the ore Rate & type of technological progress are influenced by the degree of resource scarcity – as extraction cost increases → new opportunity to develop new technologiesRate & type of technological progress are influenced by the degree of resource scarcity – as extraction cost increases → new opportunity to develop new technologies

5 Substitution:Substitution: The easier the substitution the smaller the impact of  availability &  costs- F1 & F2 areThe easier the substitution the smaller the impact of  availability &  costs- F1 & F2 are Substitution possible S1 O F1 F2 O2 X3 X1 Y2 Y1 X2 rt. Angled iso-quants – F2<F1 – S1: possibility for substitution – tech used by S1 & F1 are diff - …. O1

6 Some factors like  population & income, may  the likelihood of the scarcity while these three (exploration & discovery, technological progress, input substitution) mitigate the seriousness of scarcity.Some factors like  population & income, may  the likelihood of the scarcity while these three (exploration & discovery, technological progress, input substitution) mitigate the seriousness of scarcity. To determine which set of factors dominates, we must examine the evidence.To determine which set of factors dominates, we must examine the evidence.

7 Detecting Resource Scarcity Selecting means to detect scarcity : 1 st step in assessing the seriousness of scarcity – criterion for ideal indicators:Selecting means to detect scarcity : 1 st step in assessing the seriousness of scarcity – criterion for ideal indicators: Foresight:Foresight: ComparabilityComparability computabilitycomputability

8 Applying the Criteria The physical indicators:The physical indicators:  Resource Prices (RPs): efficient RPs maximise net benefit to the society – market prices may not be efficient  Scarcity Rent (SR) : payment accruing to a resource owner when user cost is +ve – if future didn’t matter there would be no scarcity rent – can be used as indicator for renewable & depletable resources – SR for all open access resources is zero -  SR ↑ availability of resource

9  Marginal Discovery Cost (MDC): SR is not observable directly ∴ MDC if can be observed is = MSRent – unluckily very little information on MDC is available ∴ not of much use  Marginal Extraction Cost (MEC): With given technology for extraction as lower grades are extracted MEC is expected to  - MEC is a signal of the amount of sacrifice needed to procure each unit of resource – can approximate unit extraction cost with available information – Harold Barnett & Chandler Morse (1963): Ci = (α i L i + β i K i ) / Q i

10 Evidence on Resource Scarcity Different studies to understand degree of scarcity – different approaches – different conclusionsDifferent studies to understand degree of scarcity – different approaches – different conclusions Physical indicators: reserve-to-use ratios – In 1970 many metals had a ratio of less than 30 yrs – But we have not exhausted those yetPhysical indicators: reserve-to-use ratios – In 1970 many metals had a ratio of less than 30 yrs – But we have not exhausted those yet  Demand side: key is in ability to substitute renewable for depletable natural resources – to assess potential degree of substitution between natural resources & other commodities is to estimate a construct known as ‘elasticity of substitution’ (б)

11  Supply side: studied by Goeller & Weinberg (1978) – tried to find current & future availability – computed static reserve indices for each substance - phosphorus: will run out 1 st will last another 1300 yrs – other resources for millions of years – 2 main conclusions: o except phosphorus, a few trace elements for agriculture & energy fossil fuel, there is virtually unlimited supply oTransition away from these limited resources will mean a relatively little loss in standards of living – maximum: double prices of current level

12 In reality we are somewhere between pessimism of reserve-to-use ration & optimism of Goeller and Weinberg forecastIn reality we are somewhere between pessimism of reserve-to-use ration & optimism of Goeller and Weinberg forecast Skinner suggested that a different distribution may be the truth – 3 groupsSkinner suggested that a different distribution may be the truth – 3 groups Skinner hypothesis implies that as we mine lower grades of geo-chemically scarce resources we shall find less lower grade ore available over some considerable range of gradesSkinner hypothesis implies that as we mine lower grades of geo-chemically scarce resources we shall find less lower grade ore available over some considerable range of grades

13 A model of future market in US for copper Rate of extraction rapidly over 100 yrs – extraction peak at 2100 – peak extract n rate 8 times of current rateRate of extraction rapidly over 100 yrs – extraction peak at 2100 – peak extract n rate 8 times of current rate Will exhaust by 2070 – then from copper rock - 0.05% maximum grade - expensive but no longer scarceWill exhaust by 2070 – then from copper rock - 0.05% maximum grade - expensive but no longer scarce In the LR other substitutesIn the LR other substitutes Recycling – big businessRecycling – big business Price  drastic over next centuryPrice  drastic over next century Price of copper  10 fold – cost of copper related services  by 10 foldPrice of copper  10 fold – cost of copper related services  by 10 fold

14 Economic Indicators Extraction cost: Barnett & Morse’s empirical evaluations – found no evidence of  scarcity except forestry – have given 4 explanations for absence of any evidence of scarcityExtraction cost: Barnett & Morse’s empirical evaluations – found no evidence of  scarcity except forestry – have given 4 explanations for absence of any evidence of scarcity  Historically, as higher grade resources exhausted, lower grade became available  Users shifted to less scarce resource  As price ↑  incentive to explore  Technological change → ↓ cost of extraction ∴ Optimistic future ∴ Optimistic future

15 Scarcity due to growth is foregone conclusion – discoveries have  possibilities of substitution - to unimaginable degree & man has many alternatives availableScarcity due to growth is foregone conclusion – discoveries have  possibilities of substitution - to unimaginable degree & man has many alternatives available Scepticism may be is more appropriate for such conclusions – Barnett & Morse fail to consider energy costs in measuring cost of extraction – whether scarcity is taking place depends on not only availability & cost of labour & capital but also on scarcity of energyScepticism may be is more appropriate for such conclusions – Barnett & Morse fail to consider energy costs in measuring cost of extraction – whether scarcity is taking place depends on not only availability & cost of labour & capital but also on scarcity of energy

16 Study by Johnson, Bell & Barnett extended analysis on American unit extraction costs (1980) and found thatStudy by Johnson, Bell & Barnett extended analysis on American unit extraction costs (1980) and found that -B-M findings of  scarcity in forestry was reversed in 1958-70 period -Out of 15 agricultural commodities all had falling unit extraction costs during 1958-72 period -Of 11 mineral & fuel commodity groups studied all had extraction cost -Unit extraction cost have  in commercial fishing from 1962 – only case of  scarcity

17 Studies of resource price trendsStudies of resource price trends  Scarcity of resources  then their prices should  faster than other goods  Today prices of food grains & food items are  faster than other prices mainly due to less land available for farming  Slade Margaret (1982) investigated the prices that suggested that “if scarcity is measured by relative prices, the evidence indicates that non- renewable natural resources commodities are becoming more scarce.”

18 Discovery cost:Discovery cost: Fisher (1981) compared with average discovery cost in US for oil & gas for 1950-71. In 1999 - around $16 a barrel. July 2008, peaked at $147 a barrel. In the months that followed, as fears of a global recession grew, prices plunged to the $75 a barrel range. Now? Now price has changed for a different reason all together – difficult to estimate marginal discovery costs because the magnitude of any given year’s discoveries remain unknown Fisher (1981) compared with average discovery cost in US for oil & gas for 1950-71. In 1999 - around $16 a barrel. July 2008, peaked at $147 a barrel. In the months that followed, as fears of a global recession grew, prices plunged to the $75 a barrel range. Now? Now price has changed for a different reason all together – difficult to estimate marginal discovery costs because the magnitude of any given year’s discoveries remain unknown

19 Juxtaposing Alternative Measures: No single indicator universally dominates all others better to use several indicators, deriving informationJuxtaposing Alternative Measures: No single indicator universally dominates all others better to use several indicators, deriving information

20 To conclude Goeller & Weinberg’s work makes it clear that we have abundant resourcesGoeller & Weinberg’s work makes it clear that we have abundant resources Historically no evidence of scarcity except for oil & gasHistorically no evidence of scarcity except for oil & gas Our ability to detect scarcity is limitedOur ability to detect scarcity is limited We are unable to incorporate various environmental costs of increasing resource useWe are unable to incorporate various environmental costs of increasing resource use If history doesn’t indicate scarcity, doesn’t mean that it will not happen in future.If history doesn’t indicate scarcity, doesn’t mean that it will not happen in future.


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