AGEC 604 Natural Resource Economics

Transcription

1 AGEC 604 Natural Resource Economics Allocation of Nonrenewable Resources Part I Consumption of Materials in the United States, By Grecia Matos and Lorie Wagner U.S. Geological Survey Originally printed in Annual Reviews of Energy and the Environment, 1998, v. 23, p Link to report Resource Reserves Resource Reserves - Graphically Price Current Price Potential Reserves Resource Endowment Current Reserves Quantity Resource Taxonomy Natural Resources Material or processes which occurs w/o human initiative, but which are useful directly or indirectly in human activities Stock Resources Natural resource which exists in fixed amounts in all time frames short of geological Recyclable Resources Although currently being used, the resource exists in a form allowing its mass to be recovered 1

2 Resource Taxonomy -2 Flow Resources Natural resources which are subject to changes in quantity or quality by natural processes Exhaustion Physical no more physical quantity is available Economic when costs of obtaining the resource exceeds the market value Scarcity Availability of resource relative to demand Conservation vs. Depletion Conservation and Depletion Relative terms: relative to some base Key Depletion is not a sudden running out, but a progressive change in quality, quantity, and / or costs Quantity Conservative Base Depletive Dynamic Efficiency -1 Review of Dynamic Efficiency Review tutorial Assumptions Resource can be depleted Two periods Constant marginal extraction costs (MEC) No substitutes Constant WTP Competitive market Criteria Maximize the present value of the net benefits 2

3 Dynamic Efficiency - 2 Condition PV(MNB 1 )= PV(MNB 2 ) Graphically PV(MNB 1 ) Period 1 PV(MNB 2 ) Period 2 MUC 0 Q * 1 Q Q Q * 2 0 Quantity Dynamic Efficiency - 3 Results Use all of the resource Consumption in period 1 > consumption in period 2 Add realism by relaxing the assumptions Case 1, > 2 Periods -1 Dynamic Efficiency Maximize the present value of net benefits over the time horizon Condition Present value of marginal net benefits are equal for all time periods MNB 0 = MNB 1 / (1+r) = MNB 2 / (1+r) 2 = MNB 3 / (1+r) 3 =... Source: O.C. Herfindahl. Depletion and Economic Theory. in Extractive Rsources & Taxation

4 Case 1, > 2 Periods -2 Resource Usage Choke Price Units Resource Consumption MUC Total MC = MUC + MEC = Price MEC Sidelight P Choke Price Demand Q Case 1, > 2 Periods -3 Consumption stops when MC = choke price Smooth transition to exhaustion Use up the entire resource Production and consumption depend on each period Two values for the resource asset Consumption value Asset value Case 2, Renewable Substitute - 1 Renewable Substitute Resource MC 2 MC Switch Point 1 Units Resource Consumption MEC 1 Nonrenewable Resource Renewable Resource 4

5 Case 2, Renewable Substitute - 2 Marginal cost of the substitute sets the upper limit on MC of resource 1 More of the nonrenewable resource is extracted earlier Why still use up the entire resource and upper price lower Switch point transition is smooth The Road Continues AGEC 604 Natural Resource Economics Allocation of Nonrenewable Resources Part II Consumption of Materials in the United States, By Grecia Matos and Lorie Wagner U.S. Geological Survey Originally printed in Annual Reviews of Energy and the Environment, 1998, v. 23, p Link to report 5

6 Case 3, Nonrenewable Substitute - 1 Depletable Substitute Resource Switch Point MC 1 MC 2 MEC 2 MEC 1 Case 3, Nonrenewable Substitute - 2 Transition is smooth Rate of increase of MC is lower after the switch point Could be different grades instead of two resources Case 4, Increasing MEC & Sub. - 1 Take Case 2 Renewable Substitute and Add Increasing MEC for Resource 1 Switch Point MC 1 MC 2 Resource Consumption Units MEC 1 Resource 1 Resource 2 6

7 Case 4, Increasing MEC & Sub. - 2 Transition is smooth Marginal User Cost (MUC) declines as MEC 1 increases At the transition point MUC = 0 Cost of extraction results in some of resource 1 being left in the ground Sensitivity Analysis Discount Rate Sensitivity Analysis (SA) Case I Decrease the discount rate Examine what happens if don t re-optimize and if you re-optimize the problem Choke Price Re-optimized solution Case I MEC Lower discount rate same initial price SA - Discount Rate - 2 New Optimal Path Higher initial price and lower later prices Why increase in MUC is slower Leads to conservation / slower depletion Society vs. private? 7

8 SA - MEC Decrease MEC Choke Price Same initial price Re-optimized solution Case I MEC 0 MEC 1 SA -MEC -2 New Optimal Path Lower initial price and higher later prices Shortens period of depletion Requires MUC to be higher / MEC drops more than price drops Can consider a cost increase MEC 1 before cost increase MEC 0 after cost increase SA Demand - 1 Increase in Demand Choke Price Constant k Increase in demand Case 1 D 0 D 1 MEC Quantity Initial price higher Less time to depletion 8

9 SA Demand - 2 Increase in Demand Outward Shift k 1 k 0 Increase in demand Case 1 D 0 D 1 Quantity Initial price higher Less time to depletion New choke price MEC Exploration and Technological Advance Exploration New resources are found Lowers MEC or at least retards its growth Results Smaller and slower decline in consumption Rise in MC is less Price is lower Technological Advance Lowers MEC increases consumption Environmental Costs Environmental Costs Additional cost Results Rate of consumption is lower Case of substitutes Switch to substitute earlier Smaller cumulative amount of the resource used 9

10 Private Property Question Will the dynamic efficient solution be reached as described in the previous slides if the resources are owned privately? Answer Yes if Environmental costs are borne by the resource owner Private discount rate = social discount rate 10