Vaasa Env Lect 7
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Transcript of Vaasa Env Lect 7
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8/12/2019 Vaasa Env Lect 7
1/15
Allocation ofDepletable & Renewable Resources
Finite stocks of depletable resources
when do they get scarce?
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8/12/2019 Vaasa Env Lect 7
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When demand is in excess, Should we allow
the system to collapse? Price of oil high $147+ in June 2008 - falls in
2008 to a low $32 in Dec 08 - now rises$ 69
on Oct, 05 2009still availability reducesdemand risinglife style
New type of vehicles?solar/wind/CNG?
What happens if no substitute or renewableresource is available?
Some like solar or surface water, are atconstant MC
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8/12/2019 Vaasa Env Lect 7
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Concepts of stock of depletable resources
3 concepts to classify:
Current reservesknown resources
Potential reservesdepends on how much people
are ready to pay
Resource endowmentgeological
Common mistakes in understanding concept:
- to understand distinctions use data on current reserves -
Fundamental errorunderstatement of time- Assuming that entire resource can be made at a price that
people are ready to pay
We can never determine actual size of endowment.
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8/12/2019 Vaasa Env Lect 7
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Other categories:
- depletable, recyclable resources - copper
- recyclable resource
- Current reserves of depletable, recyclable resource
can be augmented by economic replenishment & byrecycling.
- Their potential reserves can exhaustdepends on
demand & durability and ability to reuse the products- All depletable resources are not recyclable/reusable
coal, oil & gas once heated escape in atmosphere
non-recoverable
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8/12/2019 Vaasa Env Lect 7
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- All depletable resources are finite
- Reusing & recycling makes them last longer
- Renewable resources can be replenished - naturally- For some, continuation & volume of flow depends on
humansFishing, soil erosion
- For some flow independent of humanssolar
- Some can be stored with proper facilitiessolar energy
converted to biomass by photosynthesis.
- A different service is provided by storage of renewable
resources than storage of depletable resources.
Can serve as means to
smoothen out cyclical
imbalances of SS & DD
Extends their
economic life
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8/12/2019 Vaasa Env Lect 7
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Storage of
Renewable resources - smoothens cyclicalimbalances of demand & supplycan create bufferstocks
Depletable resources - extends their economic life
Challenge for depletable resources: allocatingdwindling stocks among generations
Once depletable resources stocks dwindle we tend togo to renewable resourcesthen we must sustain
their flow Challenge for managing renewable resources:
maintenance of an efficient & sustainable flow
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8/12/2019 Vaasa Env Lect 7
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How to respond to these challenges?
Depletable doesnt run out suddenly
When there is a substitute renewable resource availableto a depletable resource at constant marginal costoil &solar energy
Transition will happen if its MC < maximum willingness
to payMC of Dpl res will not exceed beyond MC ofRenwl res, as society will move to RR when it is cheaper
Maxmwillingness to pay (choke price) sets upper limiton total marginal cost when no substitute is available
MC of extraction of the substitute sets upper limit on theprice when one is available
Quantity extracted gradually falls as MC rises until
switch is made to the substitute
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8/12/2019 Vaasa Env Lect 7
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Switch Point
If a renewable resource is available, more of
depletable will be extracted - in the future newresource is available
Depletable resource exhausted sooner
At switch point (transition point) Cnof RR begins
Consumption sequencing: Depletable resource
switch point renewable resource
Transition from one constant cost depletable resource
to another depletable resource with a constant buthigher MC
When total MC of 1stresource would and then
when is = MC of 2nd, at time of transition
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8/12/2019 Vaasa Env Lect 7
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MC rises slowly for 2ndresource, at least initially.
Total MC = MEC + MUC. In both MEC is constant
while MUC increases at rate r. At the time oftransition MEC constitutes much larger proportion of
TMC for 2ndresource than for 1st.
Price
Transition Point Time
MExtrCt1
MECost2
TMC1 TMC2
O
T*
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8/12/2019 Vaasa Env Lect 7
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Increasing marginal extraction cost (MEC)
Efficient allocation of DRes in longer time +availability of other DRes that are perfect substitutes
Situation: When MEC of depletable res. rises with
cumulative amount extracted1stgrade then 2ndgr
Dynamic efficient allocation by maximising PV of
NB using modified cost of extraction function
MUC falls over time & at transition it goes to zero
MUCopportunity cost reflecting forgone futuremarginal net benefits
Under increasing cost every unit extracted increases
the cost of extraction
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8/12/2019 Vaasa Env Lect 7
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As current MC rises over time, sacrifice made by
future generations fallsnet benefit received bythem, if a unit of resource is saved for them gets
smaller & smaller, as MEC gets larger & larger
Opportunity cost of current extraction drops to zero &
TMC = MEC at switch point Under constant cost reserve gets exhaustedunder
increasing some is left
History: Cost of depletable resource (oil) has
overtime
resources are not used efficiently?
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8/12/2019 Vaasa Env Lect 7
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Role of exploration & technological progress
Exploration for new resource? Technologicalprogress?these two are significant in determiningactual consumption path
New resources search is expensive MEC
Solar used in Indiacostly installationbut if oilprices all the timesolar is future
MC of known resource larger the potential in netbenefits from exploration
With low MC new resource consumption With no new resource Cn falls
More extraction with technological progress
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8/12/2019 Vaasa Env Lect 7
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Market Allocations
Actual marketsefficient allocation?
Profit maximisation compatible with dynamicefficiency?
Resource in the ground has 2 potential sources of value
to owneruse-value: when sold & asset-value: when
in ground
While price rises in-ground is getting more valuable
capital gain when conserved
A wise producer balances present & future productionto maximise the value of resource
In prescient competitive market P of res = TMC of
extracting & using the resource
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8/12/2019 Vaasa Env Lect 7
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Generally TMC curve shows changes in the prices
over timeexpected All other costs except evn costs are borne by the
producere.g. health risks, acids in water from
mines - if no outside attempt to internalise it, will not
be part of extraction decision If MC is by cost of env. DamageP & DD -
Rate of Cn lower - time of transition later
Environmental & natural resource decisions areintimately linked
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8/12/2019 Vaasa Env Lect 7
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To sum up, Efficient allocation of depletable & renewable resources
depends on circumstances
When extracted at constant MC, efficient quantity ofDRes extracted over time declines smoothly to zero
If renewable constant-cost substitute is available thequantity of DRes extracted will smoothly
In both cases, all available DRes will be used up& MUCwill over time and will be maximum when last unit isis extracted
Technological progress (doesnt allow MC to rise) &exploration (expands size of current reserves) activitytend to delay the transition to renewable resources
Market allocation of DRes can be efficient when PR
structures are properly defined