Chapter 15: Natural Resource and Energy Economics

• Population growth → People consuming many more resources

  • Are current economic system + high living standards sustainable?

• Population growth

  • Birthrates falling rapidly throughout world
  • Replacement rate - Birthrates necessary to keep populations from falling over time
  • Total fertility rate - Average number of children that a woman is expected to have during her lifetime
  • Demographers - Scientists who study human populations
  • Overall world population still increasing
  • Fewer people → Fewer demands on society’s scarce resources
  • Social + economic constraints on having children

• Resource consumption per person

  • Supply of productive resources growing faster than demand for resources
  • Higher resource consumption per person
  • Decline in population growth + lower resource consumption per person → Regulate future increases in resource demand
  • British thermal unit - Amount of energy required to raise the temperature of 1 pound of water by 1 degree Fahrenheit
  • Living standards in poor countries increase → Resource demand increases substantially
  • Must use limited resources efficiently

• Energy economics

  • Economy becoming efficient at using energy to produce goods + services
  • More technological improvements → More output produced w/ same amount of energy input
  • Using a mix of different types of generation tech (variety of energy sources)
  • Run out of oil → Alternatives quickly available
  • Better tech → Producing alternatives becomes much cheaper
  • Many cheap energy sources have high negative externalities

• Natural resource economics

  • Net benefits - The total dollar value of all benefits minus the total dollar value of all costs, so that a project’s net benefit is equal to the dollar value of the gains or losses to be made
  • Renewable natural resources - Include things like forests and wildlife, which are capable of growing back, or renewing themselves, if they are harvested at moderate rates
  • Nonrenewable natural resources - Include things like oil, coal, and metals, which either are in actual fixed supply (like the metals found in the earth’s crust) or are renewed so slowly as to be in virtual fixed supply when viewed from a human time perspective (as is the case with fossil fuels like oil and coal, which take millions of years to form out of decaying plants and animals)
  • Weigh costs + benefits of present + future use

• Using present value to evaluate future possibilities

  • Use resources now or later?
  • Consider time-value of money
  • Present value - Present-day equivalent of future value of money
  • Direct comparison of benefits from 2 possible courses of action
  • Use cost-benefit analysis
  • Allocate resources to best uses over time
  • Properly account for future net benefits

• Non-renewable resources

  • User cost - Current extraction and use means lower future extraction and use
  • Extraction costs - Include all costs associated with running the mine, digging out the coal, and preparing the coal for sale
  • Total costs = Extraction costs + user costs
  • Profit-maximizing extraction firms want to extract resources at whatever rate will maximize streams of profit over time

• Incomplete property rights → Excessive present use

  • No way to profit from conservation → Resources extracted too quickly
  • Conflict diamonds - Diamonds that are mined by combatants in war zones in Africa in order to provide the hard currency that they need to finance their military activities
  • Elephant preservation

• Renewable resources

  • Proper property rights → Incentive to preserve resources + manage on sustainable basis

  • Forest management

  • Large variation in growth rates caused by differences in property rights

  • More action in enforcing property rights over forest areas

  • Forestry companies harvest + replant

  • Fishery - Stock of fish or other marine animal that can be thought of as a logically distinct group

  • The only way to benefit economically from a fish is to catch it and thereby turn it into a private good

  • Fishers try to outfish each other

  • Fishery collapse - When a fishery’s population is sent into a rapid decline because fish are being harvested faster than they can reproduce

  • Gov’ts trying to limit # of fish being caught each year

  • Total allowable catch (TAC) - Under this system, biologists determine the TAC for a given fishery, for instance, 100,000 tons per year. Fishers can then fish until a total of 100,000 tons have been brought to shore. At that point, fishing is halted for the year.

  • Individual transferable quotas (ITQs) - Individual catch size limits that specify that the holder of an ITQ has the right to harvest a given quantity of a particular species during a given time period

    • Encourage low cost + efficient fishing vessels

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