We begin by discussing scarcity as an economic concept that includes more than just. limited availability of physical resource stocks. Next, we present a simple two-period model of non-renewable resource extraction that we use to. understand the economic concept of scarcity and how. resource owners will take this into account when deciding how much to extract. The critical point in the economic analysis of resource management is as follows: "inventory" a. a natural resource, like oil, depends not only on the physical availability of that resource in the earth's crust, but also on its marginal extraction. the costs and prices people are willing to pay to buy.
The total resources available to the Earth are of course both unknown and fixed; they have only physical dimensions. But the part of this donation is. potentially useful to humans depends on both geological availability and economic value. In addition, technological progress continuously affects the costs of resource extraction. reducing these costs overall) and the value of specific resources to society.
The degree of certainty for the existence of materials is described in terms such as proven,. The categories of feasibility of recovery are defined by the terms recoverable, pre-marginal and sub-marginal. It is one that is based on limited sampling and is based on reasonable but limited assumptions.
Classifications of mineral reserve and resources
Based on degree of assurance of occurrence
Measured Resource
Efficient Extraction in Two Periods
The marginal cost of extracting a barrel of oil (which could include labor and electricity, for example) is constant at MC = $3. We would equate the marginal benefits of current oil extraction with the marginal costs. If we take out fourteen barrels today, as we would like, what will be left for tomorrow?
Assuming no change in demand and marginal cost from today to tomorrow, if we apply the static efficiency rule again tomorrow, we will want to pump fourteen more barrels. When a resource is limited, like our oil well with only twenty barrels, a cost of extracting one unit of that resource is the lost opportunity to extract.
If we take into account the marginal user costs associated with oil extraction, this will, as with any cost increase, reduce the amount of oil we can efficiently extract today, leaving more oil in the ground for tomorrow. The dynamic two-period problem we now solve is different from the above static three-period efficiency problem. First of all, because we are interested in the value of oil extraction today and tomorrow.
The marginal benefits and marginal costs of oil extraction will thus be expressed in present value - their value. Second, we will introduce the inventory constraint directly into our efficiency problem. To do this, we will define the amount of oil available to extract tomorrow, q2, as the difference between the total stock (twenty barrels) and the amount extracted today, q1 . That is, we will start from the assumption that in order to maximize the net yield of this oil well, we must ensure that the net yield of the last barrel pumped today is equal to the net benefit of the last barrel pumped tomorrow.
Below we solve for the effective volumes of oil to pump today and tomorrow assuming a discount rate of 10 percent.
A Closer Look at the Efficient Extraction Path
Marginal User Cost, a “Special” Externality
Economics of forest resources
The economic analysis of forest management raises two issues that have been largely absent from our discussion of nonrenewable resources. First, oil and coal mainly have value as inputs for the production and consumption of other goods, such as energy. Second, forested lands have a wide variety of property rights regimes, ranging from private ownership to open access.
We can model the amount of timber in a stand of homogeneous trees as a function of time. Over time, the trees continue to grow, but the rate of growth begins to decrease (in our model after about . thirty-three years). At some point, depending on the species, climate and a number of other factors, the trees stop growing and begin to decay, resulting in
This decision criterion makes intuitive sense because no other rotation produces a greater average volume of wood. We haven't brought any economic information into our discussion yet, so you have to guess that the answer to that question is yes. Figuring out the efficient rotation requires us to think about trade-offs, as we did in the case of petroleum.
Considering the time value of money, this might make sense. Now we introduce some economic information in the simplest possible case: a single crop. Suppose we are interested in the benefits of harvesting this group of trees once, without worrying about what will happen to them. The question “How long should I age a piece of hardwood?” is quite similar to the same question about a bottle of wine.
To answer this question we need to think about the returns on alternative investments, again represented by the interest rate. The net benefit-maximizing year in which the trees had to be cut down would occur when the net benefits from waiting equaled the net benefits from cutting. It is therefore efficient to harvest the stand when the growth rate of the timber volume, the return on our capital asset (standing trees), is equal to the interest rate.
This is called the Wicksell rule and can be applied to any optimal aging problem.
