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1、Chapter 7 The Allocation of Depletable and Renewable Resources:An Overview This chapter presents the topic of resource scarcity within the general taxonomy of resources and tries to answer the question,“Is profit maximization inconsistent with smooth adjustments to increasing scarcity?”or“Is profit
2、maximization compatible with economic efficiency?”The more general questions include,“How do markets allocate resources over time?”and even more generally,“Are we running out of natural resources?”The first of these more general questions was touched on in the two-period model in Chapter 5.Chapters
3、up to this point have been general overviews of issues and concepts.This chapter,by laying out a resource taxonomy,is an introduction for the remainder of the book starting with Chapter 8,which will begin the specific resource topics(energy,water,land,etc.).For a class in natural resource economics,
4、it is conceivable that you would want to start with this chapter.For a more general course,you might want to remind your students of the differences between natural resource and environmental economics.1.Introduce natural resource economics.2.Present a resource taxonomy.3.Present the basic vocabular
5、y such as renewable,depletable,and recyclable resource.4.Illustrate the difficulties associated with scarcity measures.5.Illustrate economic feasibility of resource extraction.6.Extend the two-period model to an N-period model.7.Present the efficient allocation of resources over time with constant m
6、arginal extraction costs and with a transition to a renewable substitute.8.Present the efficient allocation of resources over time with rising marginal extraction costs.9.Discuss the effects of environmental costs on this model.36 Tietenberg/Lewis Environmental and Natural Resource Economics,Eighth
7、Edition I.A Resource Taxonomy Most of this section covers vocabulary related to resource quantities(reserves and endowment)and extractability.Using Figure 7.1 as an overhead will prove valuable.A.A resource taxonomy is a classification system used to distinguish various categories of resource availa
8、bility.B.The three concepts used to classify the stock of depletable resources are:1.Current reserves 2.Potential reserves 3.Resource endowment C.Current reserves are resources that can be extracted profitably at current prices.D.Potential reserves depend on prices people are willing to pay for reso
9、urces.At higher prices,potential reserves are larger since more expensive extraction techniques will be economically feasible.E.The resource endowment represents the natural occurrence of resources in the earth.F.The resource endowment is a geological concept since the endowment is not a function of
10、 prices.Reserves,on the other hand,are an economic concept.G.The United States Geological Survey(USGS)keeps record for the U.S.resources and has developed a classification system based on both economic feasibility and certainty of the resource base.The categories of resources are as follows:1.Identi
11、fied resources are of known quantity and quality based on geologic evidence.2.Measured resources are those for which quantity and quality are estimated with a margin of error less than 20%.3.Indicated resources have been estimated from sample analyses and geologic projections.4.Inferred resources ar
12、e materials in unexplored extensions of demonstrated resources(identified and measured)based on geologic projections.5.Undiscovered resources are surmised to exist on the basis of geological knowledge and theory.6.Hypothetical resources are expected to exist.7.Speculative resources are undiscovered
13、materials that may occur in known deposits in favorable geologic settings.H.The seven categories listed above will fall into an additional category depending on the economic feasibility of extraction.Reserves will be those resources that are measured,indicated or inferred and economic.I.Figure 7.1 p
14、rovides this categorization from the USGS.J.Since infinite prices are not likely,the entire resource endowment cannot be made available.K.Other distinctions among resource categories include whether or not the resource is depletable and/or recyclable.L.A depletable resource is not naturally replenis
15、hed or is replenished at such a low rate that it can be exhausted.The depletion rate is affected by demand,and thus by the price elasticity of demand,durability and reusability.M.A recyclable resource has some mass that can be recovered after use.Copper is an example of a depletable,recyclable resou
16、rce.Chapter 7 The Allocation of Depletable and Renewable Resources:An Overview 37 N.Current reserves of a depletable,recyclable resource can be exhausted,but can also be augmented by economic replenishment and recycling.O.A renewable resource is one that is naturally replenished.Examples are water,f
17、ish,forests,and solar energy.P.Some renewable resources are storable.Others are not.Q.Storage of renewable resources smooths out the cyclical imbalances of supply and demand (e.g.,water storage).Storage of depletable resources extends their economic life.R.The management problem for depletable resou
18、rces is how to allocate dwindling stocks among generations while transitioning to a renewable alternative.Current use precludes future use(intertemporal opportunity cost).S.The management problem for renewable resources is in maintaining an efficient and sustainable flow.II.Efficient Intertemporal A
19、llocations This section revisits and extends the two-period allocation problem presented in Chapter 5.A.Dynamic efficiency is the primary criterion when allocating resources over time.B.Dynamic efficiency assumes that societys objective is to maximize the present value of net benefits from the resou
20、rce.C.Recall the two-period model from Chapter 5.In that model,marginal user cost rises over time at the rate of discount to preserve the balance between present and future consumption.This model can be generalized to longer time periods.D.An n-period model presented uses the same numerical example
21、from Chapter 5,but extends the time horizon and increases the recoverable supply from 20 to 40.E.Graphical representations of this model show how marginal user cost rises over time.With constant marginal extraction cost,total marginal cost(or the sum of marginal extraction costs and marginal user co
22、st)will rise over time.The graph shows total marginal cost and marginal extraction cost.The vertical distance between the two equals the marginal user cost.The horizontal axis measures time.F.Rising marginal user cost reflects increasing scarcity and the intertemporal opportunity cost of current con
23、sumption on future consumption.G.As costs rise,quantity extracted falls over time.Quantity extracted falls to zero at the point where total marginal cost reaches the maximum willingness to pay(or choke price)for the resource such that demand and supply simultaneously equal zero.H.An efficient alloca
24、tion thus implies a smooth transition to exhaustion and/or to a renewable substitute.I.If a substitute is available,the depletable resource will be exhausted at the choke price or at the marginal extraction cost of a renewable substitute if lower than the choke price.For the latter case,marginal cos
25、t still rises until the switch is made to the substitute.J.If a renewable substitute is available,the depletable resource will be exhausted sooner than it would have been without the substitute.K.The transition point to the renewable substitute is called the switch point.L.At the switch point,the to
26、tal marginal cost of the depletable resource equals the marginal cost of the substitute.38 Tietenberg/Lewis Environmental and Natural Resource Economics,Eighth Edition M.The transition can also be illustrated for two depletables with different marginal costs.This will also be a smooth transition.The
27、 rate of increase of total marginal cost slows down after the time of transition because the marginal user cost represents a smaller portion of total marginal cost for the second,higher cost resource.N.The case of increase marginal extraction cost is more complicated,but more realistic.For this case
28、,the marginal user cost declines over time and reaches zero at the transition point.With rising marginal extraction costs,each unit extracted raises the cost of extraction.Thus,as current marginal user cost rises over time,the opportunity cost imposed on future generations diminishes.In the increasi
29、ng cost case the resource reserve is not exhausted.O.The marginal cost of exploration can be expected to rise over time as well.P.The higher the expected rise in the marginal cost of extraction,the larger the potential increase in net benefits from exploration.Q.Successful exploration would cause a
30、smaller and slower decline in consumption while dampening the rise in total marginal cost.R.Technological progress would also reduce the cost of extraction.Lowering the future marginal cost of extraction would move the transition time further into the future.Total marginal cost could actually fall w
31、ith large advances in technology.III.Market Allocations This section examines whether actual markets can produce dynamically efficient allocations,e.g.,is profit maximization compatible with dynamic efficiency?A.Markets will behave well as long as the property-rights structures governing the resourc
32、es are exclusive,universal,transferable,and enforceable.B.A resource governed by a well-defined property rights structure will then have both a use value and an asset value to its owner.C.A use value is the value acquired when the resource is sold,e.g.,timber sales.D.An asset value is the value to t
33、he owner while the resource is still in the ground.If the price of the resource is rising,the resource in the ground is becoming more valuable as long as it is saved.E.Presented with well-defined property rights and reliable information about future prices,producers will choose an allocation that pr
34、ovides the maximum present value of net benefits for society,or a dynamically efficient allocation provided that social and private discount rates are equal.F.If extraction of a resource imposes a third party or external cost on society,an allocation will not be efficient.The price of the depletable
35、 resource would be too low and the resource extracted too rapidly.G.The inclusion of environmental costs would result in higher prices which will dampen demand.Thus,the resource should,with all else equal,last longer since the higher marginal cost means that a smaller amount would be extracted.The s
36、upply side effect,however,causes the transition point to be sooner.Which effect dominates depends on the shape of the marginal extraction cost curve.H.The concept of external environmental costs ties together the fields of environmental and natural resource economics.Chapter 7 The Allocation of Depl
37、etable and Renewable Resources:An Overview 39 The early part of this chapter contains a lot of vocabulary.Use of Figure 7.1(as an overhead and/or handout)should be helpful.The question of whether or not we are running out of resources should be presented in the context of the sometimes confusing and
38、 misleading indices such as the static reserve index.Examples will be helpful.(See suggested classroom exercises below.)Figures 7.27.6 might present confusion.Up to this point,most of the graphs presented have been of price/quantity relationships.It is,unfortunately,quite common for students new to
39、economics to see a downward sloping function and assume it is a demand curve.Remind them of the changed axes:for example,quantity as a function of time in 7.2(a)and marginal cost as a function of time in 7.2(b).It is also not uncommon for students to take issue with the assumption of constant margin
40、al extraction costs.It is important to point out the usefulness of this assumption in illustrating the rising marginal user cost and thus rising total marginal cost,as this can be a difficult concept.It is also important to highlight the differences between these two assumptions.This simplified vers
41、ion also allows for you to build up to the more complicated models later in the chapter.World Resources is an annual publication put out jointly by The World Resources Institute,The UN Environment Programme,The UN Development Programme,and the World Bank.Each year an extensive amount of data on the
42、status of world reserves and other resources are reported.The sections on energy and minerals might prove useful to illustrate some of the difficulties with the types of statistics that are frequently reported on the expected lifetimes of resources.I have found that copying some of this information
43、for the students and asking them to calculate reserve indices for selected metals,for example,is a useful tool and can spark an interesting discussion.Using historical data and comparing those to the more recent data is also a useful exercise.As in Chapter 5,changing the numbers for the example pres
44、ented in the Appendix will be useful as a problem set or an in-class exercise.Additionally,having students do the calculations for the examples presented will also be useful.They can also do the calculations with the addition of environmental damages.Working through the mathematics and graphs may be the best way for your students to learn this material.Are we running out of resources?