Economies of Natural Resource Discussion Questions
Description
1) 1.Water rights, markets and rates are often tied to their intended use (e.g. commercial, agricultural, and residential) and out of use or out of basin water transfers are often prohibited. Why?
2) b) Graphically and mathematically demonstrate how creating a market for trading water rights across uses (residential vs agricultural) could potentially increase the welfare (economic efficiency) of water allocation decisions. Assume water prices are high in residential use and low in agricultural use.
3) Chapter 12: We know that DV = (V0 C) r + Sr describes the decision to cut wood now versus next year. If, V0= 1000; V1 = 1250; C = 500; r = 0.10; and S = 750
a) Should we extract this year or wait until next year (please show your calculations)?
b) What if V1 were 1000 and all the rest of the variables remained the same as the original case?
c) What if r were 0.05? 0.20?
d) What if C were 750?
e) Interpret the impact of changes in the values of each of the variables (V0, V1, C, r, and S) on whether we will cut the trees today versus some later time period.
4) Chapter 14, #2. A piece of land has a market value of $4,000 (per acre) if used for agricultural purposes. A land speculator buys some of the land, paying $6,000 per acre. Five years later she sells it to a house builder for $14,000 an acre. The builder builds a house (on an acre) for $100,000 and then sells it (and the land on which it sits) to a homeowner two years later for $136,000. Assuming that the land market and housing markets are both competitive and that there is no inflation during all of this, what is the total land rent in houses, and how was that rent distributed among farmer, speculator, builder, and homeowner?
5) Chapter 15, Question #1. Show that if the marginal costs of water supply are downward-sloping, then pricing so that marginal cost equals marginal willingness to pay means that the water company will experience losses. How might these losses be made up?
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Natural resource
economics
Nonrenewable resources
Module 3
Basic economic models of non-renewable and renewable
resources
Nonrenewable resources
Natural resources that do not regenerate at a
rate that is economically viable.
Supply is economically fixed and often physically fixed.
Supply is adjusted through costly search and
extraction.
Use is often associated with externalities
Substitutes are used when choke prices are reached.
Fuels, minerals, many large animal species, many
hardwood species
Nonrenewable resources
Economic questions:
Given a certain quantity of a nonrenewable
resources available, how much should be
extracted and used
If we dont know how much stock actually exists
or where it is, how much should we spend to
find new stocks?
Since minerals are a major component of metals,
how does the economics of recycling work?
What is the role of renewable or nonrenewable
substitutes?
1
P0 – MC c =
(P1 – MC1 )
1+ r
r > 0 ? Q0 > Q1; (P0 < P1 )
Historical copper prices
Energy market imports & exports
World Energy Consumption
US Energy Consumption by Source
US Petroleum consumption by
sector
https://wri.live.kiln.digital/
Real prices of coal, gas, &
electricity; US
Energy intensity per $GDP
Natural resource
economics
Renewable resources:
Forest management
Renewable Resources
Natural resources that regenerate themselves at
an economically exploitable rate.
Economic questions remain the same, but more
complicated:
Given the biological rate of growth, current
technology, economic incentives and available
institutions, how much do we harvest and when?
What is the net present value of cutting trees today vs
letting them grow?
What is the discount rate, price of timber today and
tomorrow, cost of production, opportunity cost of land in
alternative uses.
Issues in Forest Management
Maintaining production of traditional forest
outputs
Timber products: wood, paper.
Non timber products: medicinal & aromatic herbs (oils
& spices), fruits & nuts, wildlife habitat.
Shift in primary forest activity from traditional
uses to outdoor recreation.
Conversion pressure: to agriculture, residential
or commercial uses
Identification valuation & preservation of new
types of forest services
Biodiversity, carbon sequestration, ecosystem services
Current forest extentwhere forests grow today
AndWorld
moreResources
Institute
Deforested or degraded lands:
Half of the original forest and woodlands
Intact forest landscapes
Managed natural woodlands
Managed natural forests
Degraded and deforested landscapes
World Resources Institute
Potential forest extentwhere forests might grow
And more
World Resources Institute
Forest Benefits
Non-wood Forest Products
(NWFPs)
Wood Forest Products (WFPs)
Charcoal in Morocco. - Photo: M. Verdone
Carbon Sequestration
Fuel wood
Woodland in northern Ghana. - Photo: M. Verdone
Villager in Ghana. Photo: S. Maginnis
Cultural Values
Canopy walk, Ghana. - Photo: M. Verdone
What about the
social impacts of
changing
incentives?
Volume of Wood by Age of Forest
Q wood
DQ/
Dt
Time
Forest harvest decisions
Tradeoff between time of harvest and quantity
harvested
Maximum sustainable yield (MSY): rate of
extraction that maximizes quantity extracted
over an infinite time horizon
Optimal timber harvest rotation: Extraction at
MSY implies each acre will be cut every t years,
thus 1/t of the total property should be cut each
year to minimize capital requirements for
cutting.
US Timber Harvest
Optimal harvest time
Max NB of Harvest; Optimal timing:
MB of cutting today = MC of waiting till tomorrow
If V0: Value of wood harvested this year
V1: Value of wood harvested next year
DV = V1 V0: Value of waiting 1 yr to cut.
C = harvest costs
r = discount rate
S = PV of all future net benefits when forest is harvested
with optimal rotation period.
Then: V0 C + S = NB of harvesting this year.
(V1-C+S)/(1+r) = (V0+DV C+S)/(1+r) is present
value of waiting until next year.
Optimal Harvest Model
(V0+DV C+S)/(1+r) = V0 C + S
V0+DV C+S =(1+r) (V0 C + S)
DV = rV0 rC + rS
DV = r(V0 C + S)
Benefit of waiting one more year to harvest =
Cost of waiting.
If > then wait.
If = then harvest.
If < too late.
Optimal Harvest Model
If the forest is young and growing, then..
(V0+DV C+S)/(1+r) > V0 C + S
Wait: DV is positive and greater than 1+r
As DV declines we approach the expression
(V0+DV C+S)/(1+r) = V0 C + S
Optimal harvest time.
If (V0+DV C+S)/(1+r) < V0 C + S
Too late: Past optimal harvest time.
Optimal rotation
Factors affecting optimal
rotation
1.
2.
3.
4.
Ý Harvest costs (C) Þ shift r(V0 C + S) downward,
lengthening the optimal rotation period.
Ý Interest rate (r) Þ shifts r(V0 C + S) back, reducing the
the rotation period.
Ý Price of timber (V) Þ ambiguous effect; V0 reduces, V1
increases
Ý Nontimber values (S) Þ typically reduces rotation period
Portfolio Management
Perspective
DV = r(V0 C + S)
DV/(V0 C + S) = r
Where r is the rate of return obtainable on
productive assets and DV/(V0 C + S) is the
expected rate of return on forest investments in
the future
Management objective: Maintain the trees as long
as the rate of return from doing so exceeds the
rate of return on alternative assets.
Multiple objectives:
Optimal cutting
What if the question is not how much to cut per year, but rather where (or how
many plots)?
Clearcutting vs n noncontinuous 1 acre cuts vs some intermediate solution
Consider:
H = economic costs of harvest, which increase in n
E = ecological costs of harvest, which decrease with n
T = total costs = E + H
If the Marginal Private Costs only take into account the economic costs, then the
ecological costs can be considered User Costs.
The socially optimal # of plots is that which minimizes total costs.
Economics of marine resources and other biological
resources characterized by open access
World Wild Catch &
Aquaculture Production
Historic US Fisheries Landings
Issues in Marine Economics
Overfishing: Fishing at a rate that is greater than the social
optimal
Overcapitalization: Investment in physical capital at a rate
greater than is socially optimal in order to catch more fish
more quickly (but not efficiently over time)
Water pollution
Fishing (property) rights conflicts
Bioeconomic fisheries model
At any given time there is a certain weight of fish available (ie
biomass, stock).
Fish stock in any given period is dependent upon:
Current and past fishing pressure
Predator/prey relationships
Rate of biological regeneration
Climate, water quality, disease, etc.
ForestryàFisheries Model
Same basic growth function for similar reasons
Not interested in age of fish biomass so much, but the
relationship between the total biomass and the rate of change
of the biomass
Yield/Harvest óStock relationships
Q Fish stock
Fish Biomass over Time
DQ/
Dt
Time fish stock allowed to grow (yrs)
Time
Fisheries model
Start with biological growth model
Relationship between stock size and change in stock
size
Also, relationship between stock size and sustainable
yield or harvest
All rates of harvest along the curve are
biologically sustainable
May not be biologically stable
May not be economically optimal
Can become a bioeconomic model if there is
sufficient harvest pressure to warrant
management
Logistic model of ppn growth of a fishery
MSY
y1
Growth
Function
un
st
ab
le
ck
o
t
ns
I
D
ze
Si
Stable
y2
Maximum
biomass
S3
S1
Stock size (biomass)
S2
S0
Biological model à
Bioeconomic model (Step 1)
Yield implies harvesting effort.
Transform model from stock ß> yield to effort
ß> yield function
Harvesting effort implies resources are devoted
to catching fish.
Capital goods, labor, materials, energy, time
More effort does not imply more sustained
harvest, just as more stock does not imply more
sustained harvest.
Biological model à
Bioeconomic model (Step 2)
Any yield of fish biomass implies a certain
marketable good or substitute for a market
good.
So, multiply the effort-yield curve by the unit
price of harvested fish to yield a total revenue
curve.
Similarly, fishing effort has an opportunity cost.
So, a total cost curve can be constructed to
represent the opportunity cost of a unit of effort
(perhaps wage rate, if effort = labor)
Higher opportunity cost à steeper total cost curve.
Bioeconomic fisheries model
Net income = TR-TC @ effort e
@ e*, max net income, max resource rents (r1-r2), AR>AC
@ em, MSY, but not necessarily economic
efficiency/optimality
@ e0, TR=TC, AR=AC, open access solution, rents are
dissipated.
Ways to deal with the open
access fisheries problem
1. Barriers to entry (limit effort)
Territorial use rights in fisheries (TURF)
Good for species that dont move much (shell fish,
crustaceans)
Based on physical area, not on stocks/flows.
2. Regulate practices/technologies (increase
costs)
Size of boat, tackle, length of season, licensing
Costs of enforcement may be an issue
3. Catch limits (impose quotas)
Total Allowable Catch (TAC), Total Catch Quota
(TCQ), Individual Transferable Quota (ITQ)
Can result in over capitalization
Individual Transferable Quota
1. Set the TAC to reduce harvest
2. Divide the TAC among the designated
participants according to some equitable
distribution rule in order to reduce over
capitalization incentive
3. Then allow trades to increase efficiency and
allow flexibility/evolution.
Operating currently in New Zealand, Australia,
etc. with some success.
End Module 3
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Tags:
market value
marginal costs of water supply
residential use
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