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. Three statements
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 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, Non-renewable resources
Resources 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 resources
Resources that can be regenerated over time.
Examples,
Depletable – A renewable resource that can be exploited and depleted, such as soil and clean air.

5. Coal
Exhaustable
Depletable

6. Uranium
Exhaustable
Depletable

7. Clean Water
Exhaustable
Depletable
Lake Michigan, Aquifer

8. Forests
Exhaustable
Depletable

9. Public Goods Private Goods Common Goods Club Goods Rivalrous Fish,
hunting game,
grazing land
Food, clothing, toys, cars
Non-Excludable
Excludable
Satellite television,
Golf courses,
Cinemas
National defense, lighthouses, clean air, information goods
Private Good – Beer in your fridge
Common Good – Beer on the sidewalk outside
Common/Private Good – Beer at your party you charge for
Public Good – Hulu, Bayes Rule & Information Goods.
Club Good – Hulu Plus
Public Goods
Club Goods
Non-Rivalrous

10. Questions… 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.

11. 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

12. WTP
Willingness to pay – max amount that we would spend on a good.

13. How much paper 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

14. Your Demand for Paper WTP for Paper stacks p1 p2
Quantity of paper stacks. q1 q2

15. Total Benefit from q2 WTP for Paper stacks p1 p2
Quantity of paper stacks q1 q2

16. Opportunity Cost
The benefit lost when specific environmental services are forgone in the conversion to the new use

17. Marginal Opp. Cost Curve
Price of Paper Stacks p2 p1
Quantity of Paper Stacks q1 q2

18. Total Cost
Price of Paper Stacks p2 p1
Quantity of Paper Stacks q1 q2

19. Net Benefits Price of Paper Stacks p1 p2 Quantity of Paper Stacks q1
Define Net Benefits= Total Benefits – Total Costs
Quantity of Paper Stacks q1 q1 q2 q2

20. Net Benefits Price of Paper Stacks p1 p2 Quantity of Paper Stacks q1

21. Max. Net Benefit from Paper
Price of Paper Stacks
Marginal Cost
Equilibrium Price
Marginal Benefit
Quantity of Paper Stacks
Equilibrium Quantity

22. Marginal Analysis First Equimarginal Principle –
Net benefits are maximized when the marginal benefits from an allocation equal the marginal costs
Efficient
Max. Net Benefits

23. 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?

24. 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

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

26. 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

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

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

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

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

31. For next time,
Homework #1 due