EEP101 15

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Information about EEP101 15

Published on January 3, 2008

Author: Laurence


EEP 101/ECON 125 Lecture 15: Natural Resources (NR):  EEP 101/ECON 125 Lecture 15: Natural Resources (NR) David Zilberman UC Berkeley Review of Renewable Vs. Non Renewable:  Review of Renewable Vs. Non Renewable Nonrenewable resources (mineral, fossil water, remnants of ancient civilizations, old growth forest, “dead things”). Renewable resources (fisheries, forests, grasslands, water systems, “living things”). Many renewable resources and most nonrenewable ones are exhaustible. Analysis of dynamic systems:  Analysis of dynamic systems Natural resource management is control and direction of dynamic systems. Policies affect the evolution of populations and/or resource inventories The indicators of the situation of dynamic systems are state variables- Number of fish in a lake at a moment of time Volume of water in an aquifer Policy makers affect control variables Size of harvest Price of water Systems are affected by random shocks Weather Pest infestations Quantification of NR systems:  Quantification of NR systems Measurement of dynamics systems is challenging counting fish is not easy NR resource systems may be heterogeneous trees and fish of different sizes, of different ages, and at different locations minerals of different qualities at varying locations The art of modeling identifies crucial features of the system and integrates simplicity with realism Models are approximations that are subject to error Equations of motion:  Equations of motion Depict the evolution of state variables over time How the stock of oil or number of fish change Stock size today is the resource stock of tomorrow is EQUAL TO today’s stock MINUS today’s harvest (or mining) PLUS resource stock growth (for renewable resource) PLUS new discoveries PLUS recycling Applying Our Knowledge of Interest Rates:  Applying Our Knowledge of Interest Rates Higher interest rates lead to increased mining or harvesting Resource owners that have to pay high interest for funds are more likely to mine resources & sell them than resource owners who face low interest rates Poor individuals with heavy credit constraints are more likely to mine their resources Income & credit support for the poor reduce NR mining Non renewable resources:  Non renewable resources The actual stock of non renewable resources is declining over time, but known reserves may increase because of discoveries Perceived shortages and improved discovery technologies trigger searches and lead to discoveries Known oil reserves are estimated to last 40-80 years, the same estimate was given in the 1940s Still oil and natural gas reserves may run out Non renewable resources are rarely depleted, but may become too expensive to mine Factor determining extraction: demand:  Factor determining extraction: demand Demand is reflecting marginal value of resource in applications (value of oil in transportation and heating) Higher incomes and lower prices increase demand Demand increases with increased population It may be reduced by introduction and adoption of resource conserving technologies (fuel efficient cars) It is reduced by back stop technologies (solar energy) Demand can be reduced by Taxes Population policies R&D Other factors determining extraction:  Other factors determining extraction Extraction cost- reduced mining or harvesting cost or improved infrastructure (roads) increase extraction Recycling- alternative supply sources reduce extraction Known Reserves (more reserves increase extraction) Market structure Cartels extract less than competitive producers Open access result in excessive mining Regulation and policies Technology control (restriction on use of explosives) Zoning ( do not drill in Alaska) Generic Model:  Generic Model Marginal Mining cost. MNC(x) . Marginal future cost (User costs). MFC(x). The future cost represents loss of future opportunities by present extraction. Externality cost. MEC C =Optimal allocation A=Allocation under open access B=Allocation without considering externality costs Alternative Allocations:  Alternative Allocations Open access and no regulation will result in excessive resource use (A- Pollution & future ignored) Competitive supply by firms with well defined resources, ownership rights without pollution control still result in excessive mining (B) Competitive supply when ownership is well defined and pollution is taxed results in optimum (C) Cartel may under provide resources (if price under monopoly is greater than at C) or under provide if pollution cost great than the cartel’s price increase. Elements of a Resource Policy:  Elements of a Resource Policy (1) Establishing private prosperity for the resource. This prevents the open access problem and moves from point A to point B in Figure 1. (2) Externality control. Including tax on the resource (leading to a transition from B to C). Gasoline tax in U.S. can affect Climate change dynamics reduce air pollution Resource taxes also lead to adoption of resource efficient technologies emergence of backstop technologies (recycling when appropriate) (3) Support to Backstop research (4) Subsidy for adoption of resource efficient technologies( fuel efficient cars,public transport) Renewable resources:  Renewable resources Growth provides a base for harvest without ultimate depletion. Change of stock = Growth minus harvest At a Steady state (sustainable solution) Growth = Harvest There are many sustainable solutions, the one that maximizes discounted net benefits is optimal Resource dynamics:  Resource dynamics St=resource stock time t Xt=extraction g(St)=growth. Growth formulas vary Proportional growth g(St)=St Fixed growth g(St)=Constant With non renewable resources g(St)=0 once all the stock has discovered. Equation of motion Change in stock St+1-St =g(St) -Xt Steady State St+1-St=0 harvesting equals growth Not all steady states are alike:  Not all steady states are alike Steady states outcomes are sustainable- but some sustain low stock levels and other largfe stocks Steady states analysis aims to stabilize outcomes providing the same levels of output or resoruces over long periods of time.But things change, evolve. It is useful to investigate when steady states will persist and study how chagens of conditions affect steady states. Fishery dynamics-fast growth=.1:  Fishery dynamics-fast growth=.1 Fishery dynamics-slow growth=.05:  Fishery dynamics-slow growth=.05 Steady state-fast growth=.1:  Steady state-fast growth=.1 Wait and grow:  Wait and grow Alternative strategies:  Alternative strategies There are variable strategies of resource management-and many steady states Optimal one depends on objective function interest rate and outpur prices growth equation Extraction cost If Objective to maximize net present value higher interest rate lead to higher extraction In extraction cost decline with stock-optimal steady state has larger stock Growth as function of stock:  Growth as function of stock We have steady state (harvest =growth) at B,M,C,X G growth Resource Stock M=Maximum Sustainable yield X=maximum Sustainable Stock M X B C B= low stock sustainable outcome C = High stock sustainable outcome O Alternative Sustainable Outcomes:  Alternative Sustainable Outcomes Extinction- no stock on growth X=maximum Sustainable Stock (All food goes for consumption not growth) M=Maximum Sustainable yield (Between O and X) B= low stock sustainable outcome (Between O & M) C = High stock sustainable outcome (Between M &X) Maximum Sustainable yield is not necessarily optimal Higher stocks reduce harvesting costs Lower stocks allow more extraction Alternative extraction strategies:  Alternative extraction strategies Extract first sustain later The story U.S &Europe Conserve first sustain later Occurs in fisheries which are near extinction Or in restoration efforts Time Time Extraction Extraction Open access may lead to over extraction:  Open access may lead to over extraction Competition and open access lead to over extraction- the tragedy of the commons Therefore extraction needs to be regulated Many polices are used to regualte harvesting some are better than others Optimal regulation is by incentive or tradable trading that leads to maximize net present value subject to constraint Major Contributors to extraction: Demand, Open access,Extraction technology:  Major Contributors to extraction: Demand, Open access,Extraction technology Extraction is affected by policies Policies can reduce demand and thus extraction taxes, subsidies to resource use reducing technologies Policies to reduce extraction by control of access establishing property rights requiring licenses to extract limiting harvesting season Extraction control by regulating technology restricting size of equipment restricting total harvesting capacity regulating externality caused by harvesting (By catch) Multiple benefits of resources:  Multiple benefits of resources Resources (forests, wetlands, etc.) provide multiple services (recreation, bio-diversity, etc.) Harvesting reduces alternative environmental benefits One solution: taxation of harvested resources Alternatives: subsidies for conservation (not harvesting), debt for nature, payment for environmental services Marketing of environmental amenities (Ecotourism, bio-prospecting, tropical nuts ) Intensification and conservation:  Intensification and conservation Agricultural intensifications (fertilizers,chemicals)- increases yield per acre and reduces utilized land and deforestation Aquaculture provides substitutes for fishing, but has its own environmental side effects (to be controlled) Forest plantation reduces pressure on natural forest Husbandry of animals (rhinos) would reduce pressure for tasks and other features of wild animals Fishery Issues:  Fishery Issues International water. There are international agreements and evolving “laws of the sea,” yet, open access problems continue Monitoring problems. Countries establish transferable fishing permits. Monitoring and enforcement may limit their effectiveness Regulation of timing. The size, number of boats and duration of fishing may be regulated. Limitations: (i) It leads to overinvestment in equipment. (ii) Frozen fish are inferior to fresh ones. Technology controls. Some techniques (use of explosive, fishing with fine mesh nets) have future and externality costs Aquaculture and marine culture. Provide alternative sources of fish, but have externality costs Non renewable resource prices:  Non renewable resource prices Prices are indicators of scarcity Prices of non renewable resources decline when known resources grow faster than use Prices of most non renewable resources has decline Higher interest rates lead to lower prices at present and higher future prices (they increase present mining) Higher mining cost increases prices but reduces price changes over time Optimal price of resource over time with zero extraction cost :  Optimal price of resource over time with zero extraction cost Higher interest rate reduces initial price BUT Increased rate of price changes when stock is constant More mining under higher interest rates in earlier periods and less mining beyond t=t*:  More mining under higher interest rates in earlier periods and less mining beyond t=t* Price Dynamics of Renewable Resources :  Price Dynamics of Renewable Resources The rate of the price change is affected by: The discount rate tends to increase price over time. Rate of resource population growth tends to reduce price over time (as supply increases) Extraction cost factor dampens the other two Demand growth increases prices New resource sources tend to reduce prices Prices of most renewable resources have decline over time Stock pollution:  Stock pollution Some pollution problems are dynamic in nature Climate change Ground water quality The stock may be provide negative value Without intervention competitive market leads to accumulation of pollution Polices can affect dynamics Reduce build up of stock of pollution Lead to more desirable steady state Policies may affect prices of outputs and inputs and distribution between groups and generations Market structure and interest rate will affect optimal policy

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