1. Natural Resource Economics: An Overview

2. 2 period model MUC rises at rate of discount In period 2, MUC 1+r as large as in period 1 Suggests that efficiency involves rising MUC and falling Q Generalize to longer time periods

3. MUC In order for an owner of resource to be indifferent as to the period in which they sell, PV of the MUC must be the same in all periods. This means that MUC of an exhaustible resource will increase with the discount rate.

4. price equation efficiency pricing: P t = MEC t + MUC t where  MEC refers to Marginal Extraction Cost  MUC refers to Marginal User Cost

5. MUC and MEC The existence of MUC means that price will always be different from MEC. MUC = P – MEC (net benefit) MUC is a form of scarcity rent If no scarcity, MUC = 0 If scarcity, MUC = PV of marginal net benefit in each time period If MEC = 0  Competitive firm MUC = price = MB  Monopoly MUC = MR = MB

6. social planner vs. monopolist how does allocation differ with respect to planner? “social planner”: maximize net benefit to society monopoly: maximize profit (producer surplus)

7. excel example: dynamically efficient extraction of an exhaustible resource 100 tons of coal 2 periods MEC = 0 Demand each period P = 500 – 0.5q How will 100 tons be allocated over 2 periods?

8. 2 ways to analyze 1. maximize social welfare (“benevolent social planner”): CS + PS 2. maximize PS: monopolist maxes PV profit

9. using excel solver enter equations enter parameters specify changing cells specify objective cell

10. constant MEC with no substitute

11. MUC and Q over time efficient MUC rises, reflecting increasing scarcity in response, quantity extracted falls over time until reaching zero, when total MC = highest WTP efficiency requires smooth transition to exhaustion of resource

12. transition to a renewable substitute backstop resource, available at constant MEC (e.g., solar) when is it efficient to switch to backstop? when cheaper to do so! with no backstop, max WTP (“choke price”) sets limit on total MC backstop’s MEC now sets upper limit

13. switch point prior to switch point, exhaustible resource is cheaper at the switch point, MC of exhaustible resource (including MUC) rises to meet MC of substitute consumption of renewable begins

14. exploration and discovery expensive as more easily discovered resources are exhausted, search is less hospitable environs (bottom of ocean, deep within earth) MC of exploration will rise over time