1. Why study natural resource economics?
The Self-Extinction Premise
A 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 air
Examples
Easter Island – Reliance and overuse of trees led to downfall
Mayan civilization – Pop. Growth > Food Supply

2. Opposing Viewpoints
Resources are scarce, but we will find substitutes or innovation will lead to more efficient use of the resource – “necessity is the mother of invention

3. Which of the following statements is the most correct?
History 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 can correctly adapt to solve the problem.
History shows that when faced with scarcity, societies never adapt to solve the problem.  

4. Resource Taxonomy
Natural Resource – resources that occur in a natural state and are valuable for economic activity
Exhaustible, depletable, non-renewable resources
Resources that are fixed in amount of the resource which may be used up over time.
Examples,
Renewable resources
Resources that can be regenerated over time.

5. Coal
Renewable
Depletable

6. Wind
Renewable
Depletable

7. Uranium
Renewable
Depletable

8. Water
Renewable
Depletable
Lake Michigan, Aquifer

9. Flow vs. Stock Resource Stock Resource Flows
Resources that are fixed in amount
Resource Flows
Resources that do not exist as a stock,
are not regenerative,
provide a never ending flow of services.
Examples,

10. How 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 more
Benefits < Cost => Do less
Examples,
Valuing the Resources
Economic value of the a tree
Anthropocentric view
Direct value of tree’s existence- can make a chair out of it
Indirect value – reducing carbon dioxide in air, protecting the environment from global warming, pretty and other like it

11. How many chairs should we make?
Marginal Analysis –
Tool used to answer questions of ‘how much?’, by examining very small changes.
Benefits > Cost => Do more
Benefits < Cost => Do less

12. Your Demand for Wooden Chairs
Price of wooden chairs p1 p2
Quantity of wooden chairs q1 q2

13. Total Willingness to Pay
Price of wooden chairs p1 p2
Quantity of wooden chairs q1 q2

14. Opportunity Cost – The benefit lost when specific environmental services are forgone in the conversion to the new use
Wooden Chair vs. Existence of Tree

15. Marginal Opp. Cost Curve
Price of Wooden Chairs p2 p1
Quantity of Wooden Chairs q1 q2

16. Total Cost Price of Wooden Chairs p2 p1 Quantity of Wooden Chairs q1

17. Net Benefits Price of wooden chairs p1 p2 Quantity of wooden chairs q1

18. Net Benefits Price of wooden chairs p1 p2 Quantity of wooden chairs q1

19. Max. Net Benefit from Chairs
Price of Wooden Chairs
Marginal Cost
Equilibrium Price
Marginal Benefit
Quantity of Wooden Chairs
Equilibrium Quantity

20. Marginal Analysis First Equimarginal Principle – Optimality –
Net benefits are maximized when the marginal benefits from an allocation equal the marginal costs
Efficient
Optimality –
allocations are optimal if no other feasible allocation could benefit at least one person without any deleterious effects on some other person

21. Problems
One 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 is
P=80-q
And the marginal cost of producing the product is
MC=1q
A) How much would be supplied in a static efficient allocation?
B) What would be the magnitude of the net benefits?

22. Problems
Assume a change in the quality of a good results in an increase in consumers’ willingness to pay. Illustrate this situation graphically.

23. Static Model Dynamic Model Time does not matter
Cost/Benefit Analysis – cutting down trees
Benefit > Cost => support action
Cost > Benefit => oppose action
Dynamic Model
Account for time
Cost/Benefit Analysis accounting for time
Max [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)2
r is the interest rate (discount rate)
PV[Bn]=Bn/(1+r)n
PV[B0, B1, B2]= B0/(1+r)4 + B1/(1+r)3 +B2/(1+r)2

24. Market Equilibrium Price of Good Supply Equilibrium Price Demand
Quantity of Good
Equilibrium Quantity

25. Well-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 others
Transferbility –
All property rights should be transferable from one owner to another in a voluntary exchange
Enforceability –
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

26. Equilibrium = Best We Can Do
Price of Good
Supply
Equilibrium Price
Demand
Quantity of Good
Equilibrium Quantity

27. Consumer Surplus Price of Good Supply Equilibrium Price Demand
Quantity of Good
Equilibrium Quantity

28. Producer Surplus Price of Good Supply Equilibrium Price Demand
Quantity of Good
Equilibrium Quantity

29. Total Welfare Price of Good Supply Equilibrium Price Demand
Quantity of Good
Equilibrium Quantity

30. Defining Goods Common Goods – rivalrous, non-excludable
Public Goods – non-rivalrous, non-excludable