Presentation on theme: "Why study natural resource economics?"— Presentation transcript:
1Why study natural resource economics? The Self-Extinction PremiseA society can germinate the seeds to it’s own destruction.Malthusian view – Pop. Growth can’t keep up with our use of…Oil, fish, forests, fresh water, clean airExamplesEaster Island – Reliance and overuse of trees led to downfallMayan civilization – Pop. Growth > Food Supply
2Opposing ViewpointsResources are scarce, but we will find substitutes or innovation will lead to more efficient use of the resource – “necessity is the mother of invention
3Three statementsHistory shows that when faced with scarcity, societies always correctly adapt to solve the problem.History gives no clues as to whether societies correctly adapt to solve problems of scarcity.History shows that when faced with scarcity, societies never adapt to solve the problem.
4Resource TaxonomyNatural Resource – resources that occur in a natural state and are valuable for economic activityExhaustible, Non-renewable resourcesResources that are fixed in amount of the resource which may be used up over time.Examples include fossil fuels, minerals such as iron, silver, and gold.Renewable resourcesResources that can be regenerated over time.Examples,Depletable – A renewable resource that can be exploited and depleted, such as soil and clean air.
9Public Goods Private Goods Common Goods Club Goods Rivalrous Fish, hunting game,grazing landFood, clothing, toys, carsNon-ExcludableExcludableSatellite television,Golf courses,CinemasNational defense, lighthouses, clean air, information goodsPrivate Good – Beer in your fridgeCommon Good – Beer on the sidewalk outsideCommon/Private Good – Beer at your party you charge forPublic Good – Hulu, Bayes Rule & Information Goods.Club Good – Hulu PlusPublic GoodsClub GoodsNon-Rivalrous
10Questions… How much rainforest do we really need? I want to maximize wealth and societal welfare.In order to figure that out, I need to know how many trees I should grow AND I need to know how much paper people use.
11How much of a resource should we use? Marginal Analysis –Tool used to answer questions of ‘how much?’, by examining very small changes.Benefits > Cost => Do moreBenefits < Cost => Do lessExamples,Valuing the ResourcesEconomic value of the a treeAnthropocentric viewDirect value of tree’s existence- can make a chair out of itIndirect value – reducing carbon dioxide in air, protecting the environment from global warming, pretty and other like it
12WTPWillingness to pay – max amount that we would spend on a good.
13How much paper should we make? Marginal Analysis –Tool used to answer questions of ‘how much?’, by examining very small changes.Benefits > Cost => Do moreBenefits < Cost => Do less
14Your Demand for Paper WTP for Paper stacks p1 p2 Quantity of paper stacks.q1q2
15Total Benefit from q2 WTP for Paper stacks p1 p2 Quantity of paper stacksq1q2
16Opportunity CostThe benefit lost when specific environmental services are forgone in the conversion to the new use
17Marginal Opp. Cost Curve Price of Paper Stacksp2p1Quantity of Paper Stacksq1q2
18Total CostPrice of Paper Stacksp2p1Quantity of Paper Stacksq1q2
19Net Benefits Price of Paper Stacks p1 p2 Quantity of Paper Stacks q1 Define Net Benefits= Total Benefits – Total CostsQuantity of Paper Stacksq1q1q2q2
20Net Benefits Price of Paper Stacks p1 p2 Quantity of Paper Stacks q1
21Max. Net Benefit from Paper Price of Paper StacksMarginal CostEquilibrium PriceMarginal BenefitQuantity of Paper StacksEquilibrium Quantity
22Marginal Analysis First Equimarginal Principle – Net benefits are maximized when the marginal benefits from an allocation equal the marginal costsEfficientMax. Net Benefits
23ProblemsOne convenient way to express WTP between price and quantity is through the inverse demand function. In an inverse demand function, the price consumers are willing to pay is expressed as a function of the quantity available for sale. Suppose the inverse demand function of a product isP=80-qAnd the marginal cost of producing the product isMC=1qA) How much would be supplied in a static efficient allocation?B) What would be the magnitude of the net benefits?
24Static Model Dynamic Model Time does not matter Cost/Benefit Analysis – cutting down treesBenefit > Cost => support actionCost > Benefit => oppose actionDynamic ModelAccount for timeCost/Benefit Analysis accounting for timeMax [B0, B1, B2]Present Value – $1 invested today at 10% interested yields $1.10 a year from now.Present Value (PV) of X one year from now is X/(1+r)2r is the interest rate (discount rate)PV[Bn]=Bn/(1+r)nPV[B0, B1, B2]= B0/(1+r)4 + B1/(1+r)3 +B2/(1+r)2
25Market Equilibrium Price of Good Supply Equilibrium Price Demand Quantity of GoodEquilibrium Quantity
26Well-Defined Property Rights Exclusivity –All benefits and costs accrued as a result of owning and using the resources should accrue to the owner, and only the owner, either directly or indirectly by sale to othersTransferbility –All property rights should be transferable from one owner to another in a voluntary exchangeEnforceability –Property rights should be secure from involuntary seizure or encroachment by others (ie. eminent domain)Note – Eminent domain is the inherent power of the state to seize a citizen's private property, expropriate property, or seize a citizen's rights in property with due monetary compensation, but without the owner's consent.Example, Haiti & Dominican Republic
27Equilibrium = Best We Can Do Price of GoodSupplyEquilibrium PriceDemandQuantity of GoodEquilibrium Quantity
28Consumer Surplus Price of Good Supply Equilibrium Price Demand Quantity of GoodEquilibrium Quantity
29Producer Surplus Price of Good Supply Equilibrium Price Demand Quantity of GoodEquilibrium Quantity
30Total Welfare Price of Good Supply Equilibrium Price Demand Quantity of GoodEquilibrium Quantity