Resource Economics Review: Nonrenewable vs Renewable

1. exam 2 review

2. resource economics • nonrenewable vs. renewable • maximize pv of net benefit • renewable includes growth functions • characterize efficient allocations • compare to market allocations • discuss policy to make market allocations more efficient

3. start with the price equation • efficiency pricing: Pt = MECt +MUCt • where • MEC: Marginal Extraction Cost • MUC: Marginal User Cost

4. MUC and Q over time • efficient MUC rises, reflecting increasing scarcity • in response, Q extracted falls over time until reaching zero, when total MC = highest WTP (“choke price”) or reach backstop MC • efficiency requires smooth transition to exhaustion of resource

5. constant MEC with no substitute

6. energy: efficient vs. market outcomes energy: efficient vs. market outcomes vulnerability premium

7. water efficient allocations:surface vs. groundwater • surface water • how to allocate a renewable supply among competing uses • intergenerational effects less important (future supplies depend on natural phenomenon, e.g. rain, rather than current allocation) • groundwater • withdrawing now affects future supply

8. efficient allocation: surface water • balance btw users • marginal net benefit equal across users • handle variability • above-average and below-average flows must be accommodated

9. efficient allocation: groundwater • if withdrawal > recharge, eventual exhaust resource • MEC rises over time as water table falls • pumping would stop: • no water left • MC pumping > benefit of water or MC of backstop resource (desalination) • price rises over time until choke price or switch point

10. utilities pricing: inverted block & seasonal rates(potentially efficient)

11. forests: biological harvest rule • MAI = cumulative volume end of decade / cumulative yrs of growth • harvest when MAI maximized

12. biological harvesting decision

13. economic harvesting rule • harvest at age that maximizes PV of net benefits • planting costs • borne immediately • no discounting • harvesting costs • time of harvest • discounted

14. sample problem Age Volume (cubic ft) 11 700 21 1,000 31 3,000 when to harvest 41 6,000 using biological rule? 51 8,000 using economic rule? Price: $2 Planting cost: $1,000 Harvest cost: $0.50 Discount rate: 3%

15. optimal harvest age • discounting shortens optimal harvest time • less tolerant of slow timber growth • comparing no harvest (increase in value of timber) to harvest (sell and invest) • high discount rates also destroy incentive to replant

16. fisheries: biological vs. economic harvest • biology: “maximum sustainable yield” (MSY) • yields maximum growth • largest catch that can be perpetually sustained • economics: maximize net benefit

18. too much effort! policy responses • increase MC– require fishing farther from shore, use smaller nets, boats, or motors • but artificially increasing cost inefficient • total allowable catch – restrictions on effort or size of catch • monitoring, enforcement difficult, also creates race to catch • individual transferable quotas –quotas allocated, then trade • no race, allows most efficient fishers to buy rights from inefficient fishers

19. sample problem • Costs fisher $20 to fish salmon • Salmon sells for $10 • Harvest rate given X fishers is S = 30X-2X2 • How many people will go fishing, how many salmon will be caught, and what are total profits under • Open access • Limited entry (how many fishers should be allowed to maximize profit?)