Chapter 15

Natural Resource and Energy Economics

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives

• Falling birth rates

• Sources of energy

• Running out of oil vs. running out of energy

• Resource conservation

• Property rights

15-2

Resource Supplies

• Will the world run out of natural resources?–World population 6.6 billion

–Standard of living 12 times higher than 1800

–Growing demand for natural resources

15-3

Population Growth

• Thomas Malthus 1798–Living standards remain at

subsistence level

–Population continues to grow

• Higher living standards have produced lower birth rates–Replacement rate

–Total fertility rate15-4

Total Fertility Rates 2007

Country Total Fertility Rate

Australia 1.76Canada 1.61China 1.75France 1.98Germany 1.40Hong Kong 0.98Italy 1.29Japan 1.23Russia 1.39South Korea 1.28Sweden 1.66United States 2.09

15-5

Population Growth

• Demographers –Population to peak at 9 billion

• Historically:–Death rates fall with modernization–Population explodes–Fertility rate eventually falls below

replacement rate–Children as economic assets vs.

liabilities 15-6

Resource Consumption

• Commodity demand rising the last 150 years–Population growth

–Rising consumption per person

• Commodity supply rising faster

• Declining real commodity prices

• Will this trend continue?15-7

Resource Consumption

• Resource consumption per person leveled off in richest countries–Water use

–Energy use

–Trash generated

• Resource demand will increase as more countries modernize

15-8

Energy Economics

• Dealing with energy scarcity• Rising U.S. inflation adjusted GDP

per 1 million BTU’s–Energy efficiency

• Will the world run out of energy?–Run out of oil, or cheap energy–Alternative sources–Externalities

15-9

Sources of Energy

U.S. electricity sources 2006–Coal 49%

–Nuclear 19.4%

–Natural gas 20%

–Hydroelectric 7%

–Renewables 2.4%

–Petroleum 1.6%

–Other 0.6%15-10

Alternative Energy Sources

• Economic viability of alternative fuels

• Oil price at which alternative becomes viable

–Biodiesel $80

–U.S. corn based ethanol $60

–Shale oil $50

–Tar sands, Brazilian ethanol $40

–Conventional oil $2015-11

Natural Resource Economics

• Policies for extracting resources to maximize net benefits

• Present vs. future consumption–Present value

• Renewable resources

• Nonrenewable resources

15-12

Nonrenewable Resources

• Oil, coal, and metals• Extraction strategy to maximize

stream of profits• User cost

–Sell today, cannot sell in the future• Higher expected demand

encourages less extraction today–Property rights

15-13

Renewable Resources

• Forests and wildlife

• Well structured property rights encourage sustainable use

• Optimal forest harvesting–30% of world land area

–Variation in growth rates

–Differences in property rights

15-14

Renewable Resources

• Optimal fisheries management–Fishery identified by location and

species

–Difficult to establish property rights

–Overfishing encouraged

–Policies to limit catch size

–Total allowable catch

–Individual transferable quota15-15

Economic Growth and the Environment

• Is growth bad for the environment?

• Richer countries produce and consume more

• Richer countries spend more to maintain the environment

• Environmental Performance Index (EPI)– Richer countries have higher scores

15-16

Key Terms

• replacement rate• total fertility rate• demographers• British thermal unit

(BTU)• net benefits• renewable natural

resource• nonrenewable

natural resource

• present value• user cost• extraction cost• conflict diamonds• fishery• fishery collapse• total allowable catch

(TAC)• individual

transferable quota (ITQ)

15-17

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Public Goods, Externalities, and Information Asymmetries

15-18