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Natural Resource Economics
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ECONOMICS INTERACTIONS WITH OTHER DISCIPLINES Vol II Natural Resource Economics Jason F Shogren. externality effect captures the idea that having more of the resource around at the time. of harvest implies lower per unit harvest costs Some renewable resources like fisheries. are still characterized by overexploitation because of weak property right systems and. lax enforcement Regulations considered to address these property right failures include. assignment of rights use fees liability rules and tradable quotas Natural resource. economics also examines how societies could save more of their stock of biological. diversity at lower cost by addressing basic economic principles such as relative economic. circumstances opportunity cost and incentive design The field also explores how to. design cost effective strategies to reduce risks from stock pollutants such as the. concentration of carbon feared to cause climate change Natural resource economics also. considers how to value the non market natural resource services not bought and sold in the. market place Non market valuation methods like stated preference revealed preference. and production functions are discussed,1 Introduction. Economics has long been concerned with the efficient use of its scarce natural. resources Adam Smith examined the nature of capital for land mines and fisheries. Ricardo explored how land quality matters for economic rent Malthus worried about. population poverty and the limits of agricultural resources Jevons feared the social. consequences of the depletion of coal quantity and quality These classical economists. treated natural resources as a factor of production provided freely by nature which. made it distinct from costly capital and labor The general mindset framed the problem. as one in which a resource owner made extraction choices to maximize the net present. value of the natural resource, At the start of the twentieth century economics started to treat natural resources as. something more distinct than just as a free factor of production The US government. report What About the Year 2000 prepared in 1920 by economist George Peterson. noted that o ur national greatness and individual well being is in a large measure due. to the natural resources of this country Theorists like Gray and Hotelling made this. point more precise by addressing the dynamic nature of natural resource use They made. the case that an additional intertemporal cost to extracting or harvesting natural. resources existed They argued that a resource owner should account for an additional. cost above and beyond the cost of extraction and processing the opportunity cost of. depletion or harvesting sooner rather than later After the Second World War fishery. economists explained how weakly defined property rights can lead people to. overexploit resources that inhabit the commons Note commons refers to the resource. In the late 1970s and early 1980s the economics literature began to examine the social. inefficiencies associated with stock pollutants such as carbon emissions and climate. change the loss of services from reductions in the stock of global biodiversity and the. risks to life support and aesthetic services provided by natural resources left un priced. by the market, Today natural resource economics continues to expand on these early insights by. developing theories that help explain how people and societies choose to manage and. use their limited resources both non renewable resources like minerals and fossil fuels. and renewable resources like fisheries and forests The field considers how societies. Encyclopedia of Life Support Systems EOLSS, ECONOMICS INTERACTIONS WITH OTHER DISCIPLINES Vol II Natural Resource Economics Jason F Shogren. make choices to mis manage their stock of biological diversity cost effectively to reduce. risks from climate change efficiently and to value natural resource services that are not. bought and sold in the market place The goal is to look systematically at the demand for. natural resources and at their supply both to recommend efficient use today and to foresee. impending challenges tomorrow This understanding often leads economic theory to. recommend greater resource conservation than rules based on biological criteria alone. Examined here are some lessons from natural resource economics on how people can. develop and conserve their scarce renewable and non renewable resources Topics. addressed include the efficient path to extract non renewable resources the scarcity of. natural resources the optimal harvest of renewable resources property rights structures. that promote the efficient use of natural resources and how economics values the non. market services provided by natural resources When considering how economic theory. and empirics addresses these questions one must remember that natural resource. economics is not synonymous with financial and commercial concerns The economic. theory of natural resources economics addresses both the commercial consequences. from developing a resource and the benefits from its preservation and conservation As. economist Henry Hazlitt noted t he art of economics consists in looking not merely. at the immediate but at the longer effects of any act or policy it consists in tracing the. consequences of that policy not merely for one group but for all groups Natural. resource economics is no different The field is concerned with the costs benefits and. incentives of alternative strategies for resource use including the choice of preservation. The first section considers non renewable resources optimal depletion measures of. resource scarcity and energy supply and demand The next section examines renewable. resources the rate of harvest the commons and regulation options We then consider. the economic protection of climate change biodiversity and the methods of non market. 2 Non renewable Resources, Non renewable resources are those that will eventually be exhausted These resources.
include the fossil fuels such as coal oil and natural gas and mineral resources such as. iron ore and gold This section focuses on the economic theory of efficient extraction. measures of resource scarcity and energy supply and demand. 2 1 Optimal Depletion, We first consider the economic theory of optimal extraction on a non renewable resource. like oil or coal The simplest setting is the so called cake eating problem in which. society must select the optimal strategy to use a resource over time Consider a society. that has a non renewable resource like oil For simplicity assume the resource quality is. uniform across the reserves Society s goal is to choose an extraction path to maximize. the present value of total net profits over time Recall present value is the discounted. sum of all future net profits The society must decide how much oil to supply in each. time period given the opportunity cost of keeping the oil in its reserve The opportunity. cost of delaying oil extraction is the financial return that could earn elsewhere in the. Encyclopedia of Life Support Systems EOLSS, ECONOMICS INTERACTIONS WITH OTHER DISCIPLINES Vol II Natural Resource Economics Jason F Shogren. Economic theory treats a non renewable resource as capital In general capital is a basic. building block in the production of goods and services and therefore has economic. value over time Harold Hotelling developed the seminal theory on the optimal rate to. extract a non renewable natural resource through time Consider a basic model to. illustrate Let xt represent the level of resource extracted at time t T is the end of the. planning time p y is the demand curve for the resource y is a variable of integration. c xt is the cost function for extraction and r is the rate of discount The objective is to. maximize the net present value of social benefit from a resource deposit in which social. benefit is measured by the total gains from exchange the sum of consumer surplus and. producer surplus which is written as,Max t p y dy c x t e rt dt. subject to the constraint the finite stock of the resource. where zt is the stock of the non renewable resource at time t. Necessary conditions for an interior solution are,p x t c x t t 0 3. where p xt is the market price or marginal revenue for a unit of the resource c xt is. the marginal extraction costs and t represents the shadow price on a unit of the. resource in the stock and, The first condition says that an efficient allocation of resource extraction over time is.
when the price marginal revenue is equal to both the marginal extraction costs and the. opportunity cost or shadow price of the resource in the ground This shadow price is. also called the user cost resource royalty or scarcity rent This user cost captures the. idea that there is an additional cost for extracting a resource today Since it cannot be. extracted tomorrow your opportunity set is smaller in the future which provides less. flexibility to respond to market conditions, The second condition says that the scarcity rent grows at a rate equal to the rate of. interest This is the so called Hotelling rule the most well known result in natural. resource economics The rule says that a unit of resource extracted in any period should. yield the same rent in present value terms That is if resource allocation is efficient. society cannot gain any extra benefits from shifting a unit of extraction from one time. period to another This implies that the lower the discount rate the slower the extraction. of the resource holding all else constant This occurs because the opportunity cost of. keeping the resource in the ground is low that is the relatively low rate of return. elsewhere in the economy is not tempting the owner to extract the resource sell it and. Encyclopedia of Life Support Systems EOLSS, ECONOMICS INTERACTIONS WITH OTHER DISCIPLINES Vol II Natural Resource Economics Jason F Shogren. invest the proceeds in the market If the discount rate increases due to changes in the. economy the owner now increases the rate of extraction because the opportunity cost of. not doing has increased, The Hotelling rule holds for a competitive firm as well but only when the private. discount rate equals the social discount rate Private and social discount rates can differ. however if people believe the private rate set by market conditions does not accurately. reflect the broad unpriced social desire for resource preservation Other useful. extensions in the literature include the efficiency of investing the returns from a non. renewable resource into the production of man made capital that would act as a. substitute for the resource how market structure like a resource cartel affects the rate of. extraction and how market uncertainty about price and costs affects optimal extraction. 2 2 Resource Scarcity, People often wonder whether the world is running out of resources Clearly our use of any. non renewable resource reduces its stock But the relevant question is to define what this. stock actually represents the actual and potential physical quantity of the stock the. economic viability of the stock the value of the stock and potential reserves and how to. measure the scarcity of the stock Consider now four alternative measures of resource. First a common measure of resource scarcity is the lifetime of a resource Resource. lifetime is the economic reserve of a resource divided by its current annual consumption. rate often with an allowance for a predicted growth in this rate over time For example. some have estimated that the world will run out of copper in around 2020 holding real. price constant But the problem is that if one divides a resource base by annual. consumption he is assuming real prices remain constant But if a resource becomes. scarcer its real price will increase This will reduce consumption as people find. substitute material These behavioral responses alter the lifetime measure In addition. higher prices induce producers to explore for more reserves which can increase its. stock Evidence suggests that lifetime measures for many resources are approximately. constant over time which might say more about firms desire to hold inventories of. minerals than about scarcity, A second measure of scarcity is unit cost Depleting a mine forces miners to dig deeper.
underground or wider on the surface to recover coal This increases the labor costs unit. of output which also can be of lower quality Cumulative production thus increases. average costs which is the second indicator of resource scarcity In a classic 1963 study. later supported by others Barnett and Morse studied trends in average costs over the. time period 1870 1957 With the exception of forestry they found that an index of real. unit costs declined over the period indicating decreasing scarcity People have. challenged the validity of the unit cost measures by noting that technology has. progressed over the years which has reduced unit costs and increased the size of. economic reserves They also point out that firms do not always deplete the lowest cost. deposit first as presumed by the unit cost measure Unit capital and labor costs might. Encyclopedia of Life Support Systems EOLSS, ECONOMICS INTERACTIONS WITH OTHER DISCIPLINES Vol II Natural Resource Economics Jason F Shogren. have declined due to substitution of some other input for capital and labor Finally unit. costs are based on past experience which makes it a weak predictor of future scarcity. Real prices are a third measure of resource scarcity Economists commonly use market. prices as indicators of scarcity An increase in a real price is a useful measure of scarcity. when prices signal all future and current opportunity costs of using a non renewable. resource today In the Hotelling model the price of a resource increases at the rate of. interest until it equals the price of its best substitute the backstop resource Empirical. studies suggest that real prices had remained approximately constant from 1870 to 1957. Another study showed that real price seem to be u shaped where an initial decline in. prices due to technological progress is eventually replaced by cumulative production. and rents increasing at the rate of real interest Critics however argue that real prices as. a scarcity measure are limited by market structure restrictions like mineral and fuel. cartels government interventions through price ceilings taxes subsidies that distort the. price signals and negative social impacts to the environment that are left unaccounted. for by the market price Natural resource prices might not accurately reflect scarcity if. cartels artificially keep prices high governments subsidize output to keep prices low or. if the environmental services forgone to society are not accounted. The fourth measure of scarcity is scarcity rent or user cost Scarcity rent is the difference. between price and marginal extraction cost Many economists argue that scarcity rent is. the best scarcity indicator since it shows the gap between what society is willing to pay for. one more unit of the resource and the cost of extracting that unit Rents represent the rate. of return from holding a non renewable resource deposit This rate should equal the. return on holding any other kind of asset elsewhere in the economy like a savings bond. As we saw in the Hotelling model theory predicts that an efficient depletion path. involves rents rising at the rate of interest One can however question whether firms. actually follow Hotelling s rule of optimal depletion And even if one presumes they do. empirical data is scarce Measuring scarcity rents is a challenge since firms and. governments do not keep this data forcing empirical studies to use proxy measures like. exploration costs,2 3 Energy, Economists care about scarcity because these natural resources provide the energy that. drives the modern economy Energy is a consumer good The energy derived from. renewable and non renewable resources like petroleum natural gas coal hydro. nuclear biomass geothermal solar and wind helps grow and cook our food warm and. light our homes and powers our cars Energy is a factor of production Energy. combined with capital labor and land is an essential input in the production of nearly. all goods and services around the globe Energy also has enormous strategic value for a. nation and the threat of its loss has led to war People and governments follow energy. prices with intense interest because it is so vital to our daily lives. Today the world produces and consumes nearly 400 quadrillion British thermal units. Btu of power As a comparative benchmark energy use in 1970 was about 200. quadrillion Btu China Russia and the US are the biggest producers and consumers of. world energy Together these three countries account for about 40 of the world s total. Encyclopedia of Life Support Systems EOLSS, ECONOMICS INTERACTIONS WITH OTHER DISCIPLINES Vol II Natural Resource Economics Jason F Shogren. supply and demand for energy Five nations currently produce about half of the world s. energy Canada China Russia Saudi Arabia and the USA The USA alone produced. over 70 quadrillion Btu of energy Russia and China produced over 40 and 33. quadrillion Btu And five nations consume nearly half of the world s energy China. Japan Germany Russia and the USA The US consumes nearly 95 quadrillion Btu. three and four times that demanded by China and Russia at 34 and 26 quadrillion Btu. respectively Over the last two decades the largest regional change was in the Far East. and Oceania region where energy production increased by over a 100 and energy. consumption doubled All other regions except for the former Soviet Union all. witnessed an increase albeit smaller in overall energy production and consumption. What is the current mix of primary energy supply around the world The non renewable. resources of petroleum coal and natural gas are the big three energy sources today. Petroleum remains the most important source producing nearly 40 of energy today. Saudi Arabia the USA and Russia are the three largest suppliers Coal is second. capturing 23 of production China and the USA are the leading producers Natural gas. ranks third supplying about 22 increasing its share over the last decade Russia is the. leading producer The remaining energy sources hydro nuclear biomass geothermal. solar and wind accounted for the remainder, What does the future of energy demand look like One estimate is that world energy. demand will increase by about 60 over the next two decades to over 600 quadrillion. Btu in 2020 from 380 quadrillion Btu in 1997 So what does the mix of energy sources. look like into the future Oil currently supplies the largest share of world energy. consumption about 70 million barrels day which could increase to 110 million. barrels day by 2020 Natural gas should remain the fastest growing component of world. energy demand and is projected to more than double Coal will continue at its historical. share about 22 to 24 of energy demand Nuclear power use in the future is less clear. Nuclear power could expand in developing Asian nations but decline in developed. nations Renewable resource development will be slow if the expected price of fossil. fuels remains relatively low in the near future, Given these projected trends in energy use and natural resource reserves the open.
question is whether an economic rationale exists for more or less governments. intervention in energy markets If the net gains are positive the government has three. intervention tools in energy markets to change incentives by taxing fossil fuels and. subsidizing renewable fuels to expand technological options by promoting and. subsidizing research and development R D and provide information about options. that promote energy efficiency First governments that wish to alter the energy mix can. change the relative prices through taxes on fossil fuels and subsidies for renewable. energy resources Second a government could intervene by subsidizing the R D of. new technologies that address the environmental problems associated with fossil fuel. use Third a government can also try to alter the energy market by providing. information that promotes the market penetration of new technologies including. information and outreach programs green programs market identification and. targeting Economists note that people are often reluctant to switch to new technologies. because they are unwilling to experiment with new devices at current prices Also. Encyclopedia of Life Support Systems EOLSS, ECONOMICS INTERACTIONS WITH OTHER DISCIPLINES Vol II Natural Resource Economics Jason F Shogren. factors other than energy efficiency matter to consumers such as quality features and. the time and effort required to learn about a new technology. 3 Renewable Resources, Renewable resources are those that can be maintained forever provided they are not. destroyed by neglect and misuse These resources include soils forests wildlife natural. scenery and water Economic theory also treats renewable resources as capital We. begin by considering the efficient harvest of a fishery and then discuss how this. changes for forests Next we consider the problem of weak property rights and the. commons and explore different options to regulate the overexploitation of a renewable. TO ACCESS ALL THE 24 PAGES OF THIS CHAPTER, Visit http www eolss net Eolss sampleAllChapter aspx. Bibliography, Barnett H and Morse C 1963 Scarcity and Growth The Economics of Natural Resource Scarcity 288. pp Baltimore MD Johns Hopkins University Press A classic work on measuring resource scarcity. Bergh J van den ed 1999 Handbook of Environmental and Resource Economics 1300 pp. Cheltenham UK Edward Elgar Publishers A collection of brief essays on natural resource economics. Brown G 2000 Renewable natural resource management and use without markets Journal of. Economic Literature 38 875 914 An astute essay on the current state of renewable resource. Ciriacy Wantrup S 1952 Resource Conservation Economics and Policies 395 pp Berkeley CA. University of California Press A well known exploration into resource conservation. Clark C 1990 Mathematical Bioeconomics The Optimal Management of Renewable Resources 386. pp New York Wiley and Sons A comprehensive treatment of dynamic renewable resource models. Crocker T 1999 A short history of environmental and natural resource economics Handbook of. Environmental and Resource Economics ed J van den Bergh Cheltenham UK Edward Elgar. Publishers A succinct synopsis of the history of natural resource economics. Dasgupta P and Heal G 1980 Economic Theory and Exhaustible Resources 501 pp Cambridge. Cambridge University Press A detailed text on the modeling of non renewable resources. Faustmann M 1849 On the determination of the value which forest land and immature stands pose for. forestry English translation Martin Faustmann and the Evolution of Discounted Cash Flows ed M. Gane Oxford Oxford Institute Paper 42 1968 The classic work on optimal rotation of a forest. Gordon H 1954 The economic theory of a common property resource The fishery Journal of Political. Economy 62 124 142 A seminal paper on commons and renewable resources. Gray L 1913 The economic possibilities of conservation Quarterly Journal of Economics 27 497. 519 An early paper on the theory of non renewable resources. Encyclopedia of Life Support Systems EOLSS, ECONOMICS INTERACTIONS WITH OTHER DISCIPLINES Vol II Natural Resource Economics Jason F Shogren.
Hanley N Shogren J and White B 1997 Environmental Economics in Theory and Practice 464 pp. New York Oxford University Press A textbook on modern natural resource economics. Hotelling H 1931 The economics of exhaustible resources Journal of Political Economy 39 137 175. The classic paper on the theory of efficient extraction of non renewable resources. Scott A 1955 The fishery The objectives of sole ownership Journal of Political Economy 63 116. 124 A seminal paper on the theory of renewable resources. Wilen J 2000 Renewable resource economics and policy what difference have we made Journal of. Environmental Economics and Management Review 39 306 350 A good overview on how natural. resources economics has influenced public policy on renewable resources. Biographical Sketch, Jason F Shogren is the Stroock Distinguished Professor of Natural Resource Conservation and. Management and is a professor of economics at the University of Wyoming His research focuses on the. behavioral underpinnings of private choice and public policy especially for environmental and natural. resources Before returning to his alma mater he taught at Iowa State and Yale In 1997 Shogren served. as the senior economist for environmental and natural resource policy on the Council of Economic. Advisers in the White House Currently he serves on the Environmental Economics Science Advisory. Board for the US Environmental Protection Agency and the Intergovernmental Panel on Climate Change. Wyoming Governor Geringer recently appointed him to the State s Environmental Quality Council. Shogren is also on the advisory committee for Enlibra the Western Governors Association s new. doctrine for environmental management He was an associate editor of the Journal of Environmental. Economics and Management and the American Journal of Agricultural Economics Recent publications. include Environmental Economics Oxford University Press Private Property and the Endangered. Species Act University of Texas Press Endangered Species Protection in the United States Cambridge. University Press and papers on risk conflict cooperation valuation environmental policy and. experimental economics The American Association of Agricultural Economics selected his essay with J. Tschirhart on the Endangered Species Act as the Best Article in Choices for 1999.

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