1. Market Failures and Abiotic Resources

2. Review Stocks vs. flows Fund-service vs. stock-flow resources Rival and scarce, rival and abundant, non-rival, anti- rival (additive) What’s the relationship between rivalness and fund- service, stock-flow distinction Excludable and non-excludable

3. Lecture Topics Fossil fuels and minerals Fresh Water Land

4. AND MINERALS

5. Are These Market Goods? Excludable Rival What about between generations? Resource Exhaustibility: A Myth Refuted by Entrepreneurial Capital Maintenance By John Brätland What about alternatives to fossil fuels? What is the rule for efficient production of market goods?

6. How Important are Fossil Fuels? Are they essential to modern civilization? What are some of their critical uses? Wealth of Nations and patent on steam engine More than 20,000 hours of work in a barrel of oil Extremely high energy return on energy invested Are there any suitable substitutes to conventional oil? Have we developed more substitutes or more complements since 1869?

7. Supply and Demand for Oil

8. Choice of Problem Look over syllabus for topics we will cover in this class Decide which topic most interests you Write one paragraph briefly describing the problem and your interest in addressing it. You can change your mind if you choose, but must do so in the very near future

9. Supply Curve Now

10. Supply Curve Over Time

11. Energy Per Capita in the US

12. Oil production and oil prices from 2003 to 2010. Oil prices more than tripled between January, 2005 and July, 2008, while total production increased by less than 3%. Does Supply Respond to Price?

13. Does Price Respond to Supply? i.e. do Prices Reflect Scarcity?

14. What’s the Demand Curve Look Like? Demand for essential, non-substitutable resources What are the implications for marginal analysis? What are the implications for GNP?

15. Backstop Technology Perfect substitute for oil at high enough price Conventional economists emphasize substitutability What happens if poor cannot afford it?

17. Negative Externalities = degradation of public goods What are some of the externalities? How serious are they? Are they affecting things that are essential? Are they affecting things with no substitutes? How long do they last? What is more essential and non-substitutable, fossil fuels or the things they degrade? At what spatial scales do they occur? At what temporal scales?

18. Is this an accurate depiction of MEC?

19. User Cost: The Value Arising from Scarcity What would be a fair price for oil if it were infinite? What is the opportunity cost of extracting oil today? User cost: the opportunity cost of non-availability of a natural resource at a future date that results from using up the resource today rather than keeping it in its natural state. Marginal user cost is the value of one more unit of the resource in its natural state; the opportunity cost of extracting one more unit today instead of in the future. What does marginal user cost equal in a perfectly competitive economy? The concept of RENT (royalties) and VCAT

20. User Cost: The Value Arising from Scarcity What’s the opportunity cost of not extracting oil? The Hotelling rule: balancing opportunity costs What impact should user cost have on rates of extraction? What impact does it have? Why?

22. Can you explain why, in a competitive market, producers would pay resource owners a per-unit fee equal to the MUC for the right to extract a resource? Why don’t we do this? What are the obstacles?

23. Flaws in the NCE analysis Maximizes NPV, ignores future generations No one pays external costs (generally receive subsidies instead) External costs may be unacceptably high Empirical evidence contradicts it Price poor indicator of scarcity Supply does not respond to price

24. Alternative Views Supply Information effect Scarcity effect What should we expect? Demand Property rights for future generations Rent (unearned profit) from extracting non-renewable must be invested in renewables Non-renewables cannot be depleted faster than we develop renewable substitutes

25. How Big is the Energy Challenge? What is current energy usage? What will it be by 2050? What percent is fossil fuels? How much do we need to reduce carbon emissions to stabilize the climate? What are the alternatives? What do we need to produce them? Are the alternatives market or non-market? How much energy can we get from them? What do we do?

26. Supply and Demand for Fossil Fuels

27. News articles On the road in Texas, where oil is king again

28. Fresh Water

29. Characteristics of Water Stock-flow or Fund-service? We treat it here as a stock-flow. Examples? Renewable or exhaustible? Aquifers? Surface water? Scarce or abundant? Global use has tripled over last 50 years, still rising 1 billion without access to potable water Fossil aquifers China, Ogallala Rivers

30. What’s the demand curve look like? How does this compare with a conventional demand curve? In

31. Will markets allocate water towards its best use? What is the best use? How do markets decide who gets to use something? What are the implications of income distribution with respect to the efficient allocation of water towards its best uses?

33. Will markets allocate water efficiently? Problem of natural monopoly How do monopolists maximize profits? Current policies concerning water Discussion of externalities, user cost (for fossil aquifers), rent, also applies Big issue for VCAT, also relevant to watershed management Externalities? Lack of data NAFTA and chapter 11

34. Ricardian Land What is Ricardian Land? What creates the value in land? Farmland? Urban land? Location, location, location Positive externalities How much of the value of land is rent? What’s the supply curve for land?

35. VCAT and Rent Capture Source of public finance Transportation Parks and public amenities Reduced speculative bubbles Reduced urban sprawl Reduced infrastructure expenditures Reduced CO2 emissions Increased greenspace

36. Project Steps