Economies of Natural Resource Discussion Questions


1) 1.Water rights, markets and rates are often tied to their intended use (e.g. commercial, agricultural, and residential) and out of use or out of basin water transfers are often prohibited. Why?
2) b) Graphically and mathematically demonstrate how creating a market for trading water rights across uses (residential vs agricultural) could potentially increase the welfare (economic efficiency) of water allocation decisions. Assume water prices are high in residential use and low in agricultural use.
3) Chapter 12: We know that DV = (V0 – C) r + Sr describes the decision to cut wood now versus next year. If, V0= 1000; V1 = 1250; C = 500; r = 0.10; and S = 750
a) Should we extract this year or wait until next year (please show your calculations)?
b) What if V1 were 1000 and all the rest of the variables remained the same as the original case? 
c) What if r were 0.05? 0.20? 
d) What if C were 750? 
e) Interpret the impact of changes in the values of each of the variables (V0, V1, C, r, and S) on whether we will cut the trees today versus some later time period.
4) Chapter 14, #2. A piece of land has a market value of $4,000 (per acre) if used for agricultural purposes. A land ‘speculator’ buys some of the land, paying $6,000 per acre. Five years later she sells it to a house builder for $14,000 an acre. The builder builds a house (on an acre) for $100,000 and then sells it (and the land on which it sits) to a homeowner two years later for $136,000. Assuming that the land market and housing markets are both competitive and that there is no inflation during all of this, what is the total land rent in houses, and how was that rent distributed among farmer, speculator, builder, and homeowner? 
5) Chapter 15, Question #1. Show that if the marginal costs of water supply are downward-sloping, then pricing so that marginal cost equals marginal willingness to pay means that the water company will experience losses. How might these losses be made up?

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Natural resource
Nonrenewable resources
Module 3
Basic economic models of non-renewable and renewable
Nonrenewable resources
• Natural resources that do not regenerate at a
rate that is economically viable.
• Supply is economically fixed and often physically fixed.
• Supply is adjusted through costly search and
• Use is often associated with externalities
• Substitutes are used when choke prices are reached.
• Fuels, minerals, many large animal species, many
hardwood species
Nonrenewable resources
Economic questions:
• Given a certain quantity of a nonrenewable
resources available, how much should be
extracted and used
• If we don’t know how much stock actually exists
or where it is, how much should we spend to
find new stocks?
• Since minerals are a major component of metals,
how does the economics of recycling work?
• What is the role of renewable or nonrenewable
P0 – MC c =
(P1 – MC1 )
1+ r
r > 0 ? Q0 > Q1; (P0 < P1 ) Historical copper prices Energy market imports & exports World Energy Consumption US Energy Consumption by Source US Petroleum consumption by sector Real prices of coal, gas, & electricity; US Energy intensity per $GDP Natural resource economics Renewable resources: Forest management Renewable Resources • Natural resources that regenerate themselves at an economically exploitable rate. • Economic questions remain the same, but more complicated: • Given the biological rate of growth, current technology, economic incentives and available institutions, how much do we harvest and when? • What is the net present value of cutting trees today vs letting them grow? • What is the discount rate, price of timber today and tomorrow, cost of production, opportunity cost of land in alternative uses. Issues in Forest Management • Maintaining production of traditional forest outputs • Timber products: wood, paper. • Non timber products: medicinal & aromatic herbs (oils & spices), fruits & nuts, wildlife habitat. • Shift in primary forest activity from traditional uses to outdoor recreation. • Conversion pressure: to agriculture, residential or commercial uses • Identification valuation & preservation of “new” types of forest services • Biodiversity, carbon sequestration, ecosystem services Current forest extent—where forests grow today AndWorld moreResources … Institute Deforested or degraded lands: Half of the original forest and woodlands Intact forest landscapes Managed natural woodlands Managed natural forests Degraded and deforested landscapes World Resources Institute Potential forest extent—where forests might grow And more … World Resources Institute Forest Benefits Non-wood Forest Products (NWFPs) Wood Forest Products (WFP’s) Charcoal in Morocco. - Photo: M. Verdone Carbon Sequestration Fuel wood Woodland in northern Ghana. - Photo: M. Verdone Villager in Ghana. Photo: S. Maginnis Cultural Values Canopy walk, Ghana. - Photo: M. Verdone What about the social impacts of changing incentives? Volume of Wood by Age of Forest Q wood DQ/ Dt Time Forest harvest decisions • Tradeoff between time of harvest and quantity harvested • Maximum sustainable yield (MSY): rate of extraction that maximizes quantity extracted over an infinite time horizon • Optimal timber harvest rotation: Extraction at MSY implies each acre will be cut every t years, thus 1/t of the total property should be cut each year to minimize capital requirements for cutting. US Timber Harvest Optimal harvest time • Max NB of Harvest; Optimal timing: • MB of cutting today = MC of waiting till tomorrow • If V0: Value of wood harvested this year V1: Value of wood harvested next year DV = V1 –V0: Value of waiting 1 yr to cut. C = harvest costs r = discount rate S = PV of all future net benefits when forest is harvested with optimal rotation period. • Then: V0 – C + S = NB of harvesting this year. • (V1-C+S)/(1+r) = (V0+DV– C+S)/(1+r) is present value of waiting until next year. Optimal Harvest Model (V0+DV– C+S)/(1+r) = V0 – C + S V0+DV– C+S =(1+r) (V0 – C + S) DV = rV0 – rC + rS DV = r(V0 – C + S) Benefit of waiting one more year to harvest = Cost of waiting. If > then wait.
If = then harvest.
If < too late. Optimal Harvest Model • If the forest is young and growing, then.. (V0+DV– C+S)/(1+r) > V0 – C + S
Wait: DV is positive and greater than 1+r
• As DV declines we approach the expression…
(V0+DV– C+S)/(1+r) = V0 – C + S
Optimal harvest time.
• If (V0+DV– C+S)/(1+r) < V0 – C + S Too late: Past optimal harvest time. Optimal rotation Factors affecting optimal rotation 1. 2. 3. 4. Ý Harvest costs (C) Þ shift r(V0 – C + S) downward, lengthening the optimal rotation period. Ý Interest rate (r) Þ shifts r(V0 – C + S) back, reducing the the rotation period. Ý Price of timber (V) Þ ambiguous effect; V0 reduces, V1 increases Ý Nontimber values (S) Þ typically reduces rotation period Portfolio Management Perspective DV = r(V0 – C + S) DV/(V0 – C + S) = r Where r is the rate of return obtainable on productive assets and DV/(V0 – C + S) is the expected rate of return on forest investments in the future Management objective: Maintain the trees as long as the rate of return from doing so exceeds the rate of return on alternative assets. Multiple objectives: Optimal cutting • What if the question is not how much to cut per year, but rather where (or how many plots)? • Clearcutting vs n noncontinuous 1 acre cuts vs some intermediate solution • Consider: • H = economic costs of harvest, which increase in n • E = ecological costs of harvest, which decrease with n • T = total costs = E + H • If the Marginal Private Costs only take into account the economic costs, then the ecological costs can be considered User Costs. • The socially optimal # of plots is that which minimizes total costs. Economics of marine resources and other biological resources characterized by open access World Wild Catch & Aquaculture Production Historic US Fisheries Landings Issues in Marine Economics • Overfishing: Fishing at a rate that is greater than the social optimal • Overcapitalization: Investment in physical capital at a rate greater than is socially optimal in order to catch more fish more quickly (but not efficiently over time) • Water pollution • Fishing (property) rights conflicts Bioeconomic fisheries model • At any given time there is a certain weight of fish available (ie biomass, stock). • Fish stock in any given period is dependent upon: • • • • Current and past fishing pressure Predator/prey relationships Rate of biological regeneration Climate, water quality, disease, etc. ForestryàFisheries Model • Same basic growth function for similar reasons • Not interested in age of fish biomass so much, but the relationship between the total biomass and the rate of change of the biomass • Yield/Harvest óStock relationships Q Fish stock Fish Biomass over Time DQ/ Dt Time fish stock allowed to grow (yrs) Time Fisheries model • Start with biological growth model • Relationship between stock size and change in stock size • Also, relationship between stock size and sustainable yield or harvest • All rates of harvest along the curve are biologically sustainable • May not be biologically stable • May not be economically optimal • Can become a bioeconomic model if there is sufficient harvest pressure to warrant management Logistic model of ppn growth of a fishery MSY y1 Growth Function un st ab le ck o t ns I D ze Si Stable y2 Maximum biomass S3 S1 Stock size (biomass) S2 S0 Biological model à Bioeconomic model (Step 1) • Yield implies harvesting effort. • Transform model from stock ß> yield to effort
ß> yield function
• Harvesting effort implies resources are devoted
to catching fish.
• Capital goods, labor, materials, energy, time
• More effort does not imply more sustained
harvest, just as more stock does not imply more
sustained harvest.
Biological model à
Bioeconomic model (Step 2)
• Any yield of fish biomass implies a certain
marketable good or substitute for a market
• So, multiply the effort-yield curve by the unit
price of harvested fish to yield a total revenue
• Similarly, fishing effort has an opportunity cost.
• So, a total cost curve can be constructed to
represent the opportunity cost of a unit of effort
(perhaps wage rate, if effort = labor)
• Higher opportunity cost à steeper total cost curve.
Bioeconomic fisheries model
• Net income = TR-TC @ effort e
• @ e*, max net income, max resource rents (r1-r2), AR>AC
• @ em, MSY, but not necessarily economic
• @ e0, TR=TC, AR=AC, open access solution, rents are
Ways to deal with the open
access fisheries problem
1. Barriers to entry (limit effort)
Territorial use rights in fisheries (TURF)
Good for species that don’t move much (shell fish,
Based on physical area, not on stocks/flows.
2. Regulate practices/technologies (increase
Size of boat, tackle, length of season, licensing
Costs of enforcement may be an issue
3. Catch limits (impose quotas)
Total Allowable Catch (TAC), Total Catch Quota
(TCQ), Individual Transferable Quota (ITQ)
Can result in over capitalization
Individual Transferable Quota
1. Set the TAC to reduce harvest
2. Divide the TAC among the designated
participants according to some equitable
distribution rule in order to reduce over
capitalization incentive
3. Then allow trades to increase efficiency and
allow flexibility/evolution.
Operating currently in New Zealand, Australia,
etc. with some success.
End Module 3

Purchase answer to see full

market value

marginal costs of water supply

residential use

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