Introduction to Resource Economics
Introduction to Resource Economics
Finite resources, growth and optimal management.
Anton Bondarev
Department of Economics,
University of Basel
22.09.2016
Introduction to Resource Economics
Some general ideas
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Why we need Resource Economics?
Resources are special in:
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They are typically finite;
Efficiency of their usage increases in the technology state;
This requires dynamic management.
Optimal usage of finite resources with growing efficiency.
Introduction to Resource Economics
Resource Economics
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Many environmental problems have the intertemporal
aspect: The usage today has consequences for the future
usage and/or utility
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These future effects have to be included in today’s planning of
usage
Resource Economics tackles with optimization problems
which:
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1. Include intertemporal dependencies
2. Assume usage of the natural resource which is essential for
production/well-being
Introduction to Resource Economics
Actual resource management problems
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Climate change
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Fossil fuels
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Water management
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Soil usage
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Mineral resources
Introduction to Resource Economics
Resource: Definition
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Finite: is defined by natural stock
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No production: we can only use what is out there
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Intertemporal: the usage today influences usage possibilities
tomorrow
Introduction to Resource Economics
Different kinds of resources
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Dynamic aspects:
1. Renewable resources: can regenerate over time. Water, air,
soil, climate
2. Non-renewable resources: cannot regenerate over time. Fossil
fuels, minerals
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Economic aspects:
1. Essential resources: no economic activity is possible without
them. Oil, gas, water, soil
2. Non-essential resources: can be fully substituted by
technology. Diamonds, fossil energy, metals
Remark: State of technology defines which resources are
essential and which are not.
Introduction to Resource Economics
Club of Rome and Limits to Growth
Club of Rome
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Organization founded in 1968;
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The initial goal of the Club was to promote sustainability
solutions;
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Regularly publishes simulations reports on future of the
humankind;
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These reports contain different scenarios of development;
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Data is updated in accordance with discovery of new oil
deposits, etc.;
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Majority of predictions is rather pessimistic.
Introduction to Resource Economics
Club of Rome and Limits to Growth
Result so far
“30 years of historical data compare favorably
with key features of a business-as-usual
scenario called the “standard run” scenario,
which results in collapse of the global system
midway through the 21st century.”
Introduction to Resource Economics
Club of Rome and Limits to Growth
World3 Model
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Consists of 5 interacting blocks:
1.
2.
3.
4.
5.
Agricultural system;
Industrial system;
Population system;
Non-renewable resources system;
Pollution system.
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Is the backbone of Limits to Growth simulations and
conclusions;
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Iterates the evolution of population, output and pollution up
to 2100;
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Assumes finite natural resources.
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Available online, http://insightmaker.com/insight/1954.
Introduction to Resource Economics
Club of Rome and Limits to Growth
Limits to Growth
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The Book appeared in 1972;
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Contains predictions on the time of depletion of main natural
resources;
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Idea: exponential growth requires exponentially growing usage
of resources;
Considers different scenarios:
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1.
2.
3.
4.
5.
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Standard run (Business as Usual);
Standard run with natural resources doubled;
Resources doubled plus technological change;
Technological change, resources doubled, reduced pollution;
As above plus birth control and increased food yield.
All scenarios except the last one yield collapse of the world
economy in XXIst century.
Introduction to Resource Economics
Club of Rome and Limits to Growth
Basic arguments
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Main modelled quantities:
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are growing at exponential rates.
This leads to:
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Population
Industrial production
Resources usage
Accelerating industrialization,
Accelerating population growth,
Widespread malnutrition,
Depletion of natural resources,
Deteriorating environment.
All these quantities are interrelated by some kind of positive
feedback loops.
Introduction to Resource Economics
Club of Rome and Limits to Growth
Nonrenewable resources
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There is a number of resources, essential for industrial
production;
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The availability of these resources is measured by static
reserves index;
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However the rate of resources usage is growing exponentially;
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This yields completely different estimates on the availability of
resources.
Introduction to Resource Economics
Club of Rome and Limits to Growth
Non-renewable natural resources
Resource
Aluminium
Static index
100
Exponential index
31
Chromium
420
95
Coal
2300
111
Cobalt
110
60
Copper
36
21
Iron
240
93
Nickel
150
53
Molybdenum
79
34
Natural Gas
38
22
Petroleum
31
20
Introduction to Resource Economics
Club of Rome and Limits to Growth
Role of prices
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As resource becomes scarce, its price increases;
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This slows down the rates of extraction and usage of the
resource;
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Thus the rate of usage has a bell-shaped form;
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Still lifetimes are shorter, than under static reserves index;
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Doubling or tripling of known reserves do not help at all;
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In such a situation prices will increase at a lower rate and
resource usage is higher.
Introduction to Resource Economics
Club of Rome and Limits to Growth
Main conclusion on resources
Given present resource consumption rates and the projected
increase in these rates, the great majority of currently
important nonrenewable resources will be extremely costly in
100 years from now.
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This conclusion is independent of whether known reserves will
increase and whether resources will be used in a more efficient
way.
Introduction to Resource Economics
Club of Rome and Limits to Growth
Typical simulation results
Introduction to Resource Economics
History of resources concept
Resources in classical thought
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Malthus (1766-1834): Land supply is fixed;
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Adam Smith (1723-1790): Efficient use of resources is
granted only via market mechanism;
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John Locke (1632-1704): Private property rights on the
resource, just acquisition;
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David Ricardo (1772-1823): Formalisation of steady state
corresponding to limited resource;
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John Stuart Mill (1806-1873): The first to suggest technical
progress as means to fight off limitedness of resources.
Introduction to Resource Economics
History of resources concept
Disappearance of resources in Neoclassics
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Neoclassical works focused on equilibrium, rather than
growth;
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Limited resources are no longer relevant;
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Utility, demand and exchange: no production and thus no
resources!
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Implicit assumption of ever-expanding technical change and
productivity growth.
Introduction to Resource Economics
History of resources concept
Birth of Resource Economics
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Keynesian thought: aggregate behaviour different from
individual;
Ramsey (1927): it is important to take care of future
generations:
∞
X
e−ρt U(C ) → max;
(1)
t=0
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Hotelling (1931): how to exploit finite and essential natural
resource optimally:
Z∞
max
C ,R
e−ρt U(C )dt
0
s.t.
Ṡ = −R.
(2)
Introduction to Resource Economics
Topics in Resource economics
Special role of public goods
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“Standard” public good is available for all;
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Markets do not work in its efficient provision;
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Necessity of central government;
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Types of public goods;
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Common goods, open access goods and public goods:
differences;
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Special role of environmental goods.
Are natural resources public goods?
Introduction to Resource Economics
Topics in Resource economics
Positive discount rate and intergenerational fairness
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In economic growth models positive discount rate is
ubiquitous;
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Implicit assumption of delayed consumption being cheaper;
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In terms of intergenerational distribution: we care less for
future generations than for ourselves;
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Necessary for dynamic consistency of models.
Should we discount natural resources usage?
Introduction to Resource Economics
Topics in Resource economics
Dynamic optimization
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Maximization of utility or social welfare;
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This maximization is carried out over many periods (time);
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Problem consists in finding optimal policy for each period;
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This choice is constrained by the stock variable.
Resource usage is such an optimal policy
subject to resource stock.
Introduction to Resource Economics
Topics in Resource economics
Resource economics: Microperspective
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An agent (community, firm, farm, etc.) owns/uses a
fixed/growing resource stock;
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Problem is to maximize welfare from resource usage
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Subject to the constraint on resource.
Outcome: Optimal rate of resource usage throughout time;
Examples: Water management, fossils extraction
Introduction to Resource Economics
Topics in Resource economics
Resource economics: Mesoperspective
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Several agents (firms, communities, fisheries..)
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Common usage of some reosurce (lake; forest; oil field..)
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Optimal usage vs. competitive usage: tragedy of commons
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Strategic interactions lead to suboptimal behavior
(overexploitation)
Outcome: Game-theoretic profile of resource-extraction strategies
Examples: Shallow lakes, fisheries, forestry
Introduction to Resource Economics
Topics in Resource economics
Resource economics: Macroperspective
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Maximization of growth rate over resource constraint;
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Resource may enter utility as a good or just be used in
production as a factor;
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Environmental quality is also a resource!
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Resource may be traded to boost capital investments:
Hartwick’s rule
Outcome: Set of optimal policies, including resource usage;
Examples: Economic growth with resources, International trade..
Introduction to Resource Economics
Glimpse of contents
Lectures plan
29.09
06.10
13.10
20.10
27.10
03.11
10.11
17.11
24.11
01.12
08.12
15.12
Easter Island: Dynamical systems
Hotelling model: Optimal control methods
Water management: Optimal control application
Shallow lakes model: Strategic interactions
Shallow lakes II: Irreversibility and hysteresis
Pollution as an antiresource
Resources and international trade: Hartwick’s rule
Limited resources: intergenerational fairness principle
Optimal resource management in neoclassical growth theory
No lecture
Resources in modern growth theory
Exam.
Introduction to Resource Economics
Glimpse of contents
Methods
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Dynamical systems (Lecture 2):
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Optimal control (Lecture 3):
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What is the dynamical system
How to find steady states/equilibria
Stability of those equilibria
Optimal management in time
Opportunity costs and shadow costs
Hamiltonian formalism: how to solve an optimal control
problem
Differential games (Lecture 5):
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Strategic interactions and game theory
Differential game: dynamic strategic interactions
Open-loop and closed-loop solution concepts
Introduction to Resource Economics
Glimpse of contents
Models
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Optimal resource management:
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Common resource usage and strategic interactions:
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Hotelling’s model (Lecture 3)
Groundwater mining and management (Lecture 4)
Shallow lakes problem (Lectures 5,6)
Pollution as an asymmetric common resource (Lecture 7)
Macroperspective:
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Intergenerational fairness (Lecture 8)
Hartwick’s rule (Lecture 9)
Resources in growth theory (Lectures 10,11)
Introduction to Resource Economics
Glimpse of contents
Main points
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Theory: Optimal management of the resource over time;
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Individual optimality vs Social optimality;
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Wrong management may have dire consequences: global
warming, water/food deficit...
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Evolution of the economy depends on initial conditions:
endowments.
Introduction to Resource Economics
Glimpse of contents
Dynamical systems and resources
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Rate of usage vs stock of resource;
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Limited resource for unlimited population growth;
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How to spread our resource consumption in time to be
sustainable?
Dynamical systems theory
Introduction to Resource Economics
Glimpse of contents
Optimal resource management
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Finite resource (possibly renewable);
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One agent (firm, household, country);
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Optimization criteria in time;
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Mamiximize utility/profit over time subject to resource usage
Optimal control theory
Introduction to Resource Economics
Glimpse of contents
Common resource usage
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Several optimizing agents;
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Maximize utility/welfare over time;
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Each decides how much to extract at each point in time;
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Find equilibrium, where all agents make individually-optimal
decisions
Differential games theory
Introduction to Resource Economics
Glimpse of contents
Intergenerational fairness
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Discounting problem: we value tomorrow less than today
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Yet discounting resources means we value future generations
less
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How to deal with intergenerational fairness?
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One way out is to substitute resource with capital
Optimal investments policy
Introduction to Resource Economics
Glimpse of contents
Hartwick’s rule
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One resource-rich country
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Exports are used for consumption and investments
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How to use additional income such that not to harm the
future?
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Invest all resource rent into capital
Hartwick’s rule
Introduction to Resource Economics
Glimpse of contents
Growth and resources
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Consumption today hampers growth tomorrow
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This is particularly true for limited resources
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Neoclassical theory: optimal resource extraction
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Modern theory: R&D may substitute for resources
Ambiguous role of resources in growth
Introduction to Resource Economics
Glimpse of contents
Exam example
The volume of groundwater which is available for pumping out is
governed by the differential equation:
V̇ (t) = R − Q(t),
(3)
where V (t) is the available volume of water, R is the constant
exogenous rate of inflow (regeneration rate) and Q(t) is the rate of
pumping out. The social planner is solving the problem of optimal
management, trying to balance costs and revenues of groundwater
mining. Optimization criteria is given by the objective functional:
Z T
1 2
−rt
(4)
J = max
e
w (t)Q(t) − Q (t) dt
Q
2
0
wD (t) = a − bQ(t).
(5)
Introduction to Resource Economics
Glimpse of contents
Next lecture: Easter Island
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Paper: J. Brander and S. Taylor (1998) The Simple
Economics of Easter Island: A Ricardo-Malthus Model of
Renewable Resource Use.The American Economic Review,
88(1), pp.119-138
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Role of limited resources: how to reconcile them with
population growth
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Introduction to dynamical systems and their equilibria (steady
states concept)
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The role of initial conditions and stability.