Resource Economics

1. Economic Basics
1. we cannot produce an infinite amount of everything; in general, the more we produce of one thing the less we can produce of another
• production frontier curves (http://www.glo.co.nz/Lessons/year13_economics/year13_economics_lesson1.asp or see http://www.theshortrun.com/classroom/curves/prodpossibilities.html for a nifty Flash animation) plot the possible production of one product versus the possible production of another
• values at any point along the curve represent the maximum simultaneous production (this is called the production frontier)
• economic growth is represented by the upward and/or rightward movement of the curve (the pie gets bigger)
• economic development occurs when there is enough economic growth for everyone to get a bigger piece of the pie
2. Market Forces
1. it is almost a cliche that the free market rules through the effects of supply and demand
• we can look at these effects through supply and demand curves
• these are graphs of price versus quantity
• as a rule, when the price of an item goes up, demand for it goes down, so
• the demand curve has a negative slope
• on the other hand, when the price paid for an item goes up, the available supply goes up (or you could look at it the other way around: when the supply of an item is low, the price is high)
• the supply curve thus has a positive slope
• the point where the two curves cross is called market equilibrium
• this is the point where supply is balanced with demand
2. the same curves can be drawn for things like pollution control (though the they the supply curve in particular is generally not linear)
3. technology and population growth affect the curves
• technology is thought to lower the supply curve
• we can produce more widgets at lower cost when we have better widget factories
• in theory we should all live better since we have a more widget-full life
• on the other hand, population growth pushes up demand and reduces the number of widgets available per person
• as resources become scarce, the supply curve can be pushed up as well
4. incidentally, for production which is human resource intensive (things like health care, education, the arts), the progress of technology does not lower the supply curve
• hence the price of an education or a hospital visit or a concert ticket goes up relative to the price of widgets
5. diminishing returns or economics of scale?
• the high demand and depleted resources brought about by a population explosion was predicted by Malthus to cause a dramatic drop in standard of living (the supply curve goes vertical)
• this phenomenon is called diminishing returns
• on the other hand, large markets permit production technologies and organizations that would not be possible on a smaller scale
• alternative supplies become available
• the benefits of larger markets are described as economies of scale
• remember, certain resources do not lend themselves to economies of scale (education maybe, health care, what else)
• a growing population has a tightrope to walk between paying for the immediate needs of its children and the long-term economic infrastructure that might bring about economic development
• there is a population hurdle to be jumped over
6. scarcity promotes development
• a steep supply curve gets entrepeneurial juices flowing, say the economists
• if you can find a way to produce wodgets at half the price of widgets, you can make a killing
• a high price for new widgets also promotes widget maintenance and recycling
• the net result is the formation of new resources as old ones become depleted
7. external and internal costs
• supply and demand efficiently determine the production of everything and all is well as long as everyone is paying a fair price for everything they use (remember the tragedy of the commons?)
• the out of pocket costs connected to producing an item include things such as raw materials, labor, transportation, taxes, etc
• if you can dump your waste into the air, into the water or onto the land for free, that is not an internal cost since you don’t have to reach into your pocket to pay for it
• in the long run, though, someone does have to pay for it: a cost not borne by the producer is called an external cost
• if we can internalize the environmental costs of things such as pollution and depletion, we make market forces pro-environment
8. cost benefit analysis
• this is a balance sheet of the costs and benefits of a proposed action, with all costs and benefits given in dollar values
• the cost of pollution control is usually not linear, to make the water another 9% cleaner typically costs as much as the first 90%: the graph curves up
• benefit graphs may be linear or even curve the other way (the benefit we derive from the first bit of cleanup is more than from the last bit)
• ideally, we determine the point where cost cross benefit and everyone is happy
• there is a nice explanation of cost benefit analysis by Thayer Watkins at San Jose State
• the costs may not fall on those who reap the benefits
• in practice some costs and some benefits are difficult to express in monetary terms (some would say impossible)
• there are techniques for setting dollar values on any number of intangible or non-market benefits
• there is obviously potential for abuse here since there are no objective standards to guide analysts
• external costs/benefits and the cost and benefits of alternatives must be included for a thorough and helpful analysis
• these are easily omitted or manipulated: recent calls for more thorough cost/benefit analysis of gov’t regulation may be disingenuous
• the analysis may serve only to highlight the costs of certain individuals who wish to profit at the expense of externals and intangibles
• cost benefit analysis can include considerable detail, (as in this case study--requires Acrobat Reader)
3. Classes of resources
1. a resource is anything which is needed by an individual or society
• natural resources are the things supplied by the environment
• traditionally these may have been only raw materials
• now we have learned that we also have to include landfill space, natural purification processes, etc
• human resources are abilities or attributes of people that supply our needs
• intelligence
• skills
• experience, etc

Nonrenewable or exhaustible resources: resources that are used up as they are used; typically fossil fuels and minerals=> no additional amounts of these things will be added to the earth system during the practical time-scale of human civilization

• use of these resources should be carefully planned
• a distinction should be made between resources and reserves



• mineral resources: the total existing quantities of usable minerals, whether known or unknown, economically feasible to recover or not (it costs about $10 to recover about $1 worth of gold from sea water)

versus

• reserves: the identified deposits of minerals that can be economically extracted
• as the price of a resource derived commodity changes, the economic feasibility of recovering a given deposit or resource can also change (shale oil could theoretically become recoverable if the price of oil rises high enough)
• if you think about it, "using up" a mineral resource means converting it from an economically recoverable form to a noneconomically recoverable form (it is always theoretically possible to recover a mineral from wastes that contain it); fossil fuels on the other hand are completely destroyed (ie, converted to CO₂ and waste heat) when used
• undiscovered resources can be hypothetical (thought to exist based on known conditions) or speculative (hoped to exist) (see fig 8.7 p 154)
• to date, degree of economic development has been correlated with demand for mineral resources (the US has 6% of the world's population and uses 30% of the minerals produced annually)
• high degree of mineral use has forced developed nations to import mineral commodities
• developing nations will increase in their demand for minerals
• as the price of mineral commodities increases the feasibility of substitute products increases; likewise sometimes for environmental costs (ie, air pollution makes coal less desirable as a fuel)

Renewable resources: resources that are renewed by growth or reproduction=> in theory, with proper management, these resources can be continued indefinitely

• sunlight is the ultimate source of renewable resources
• use of these resources should be managed on a sustained yield basis so that the resource is removed only at the rate is can be replaced (often easier said than done: why are the fish disappearing?)
• the book points out that we can harvest only "surplus" renewable resources
• some resource base must be left unused in order to produce the next crop etc
• often the rate of harvest depends only on market demand and available technology
• we are tempted when we see the sea teeming with fish
• we may imagine that the sea is like a wheatfield, with our ability to put grain in the barn the only limit on production, but:
• most of the fish are "harvested" by other fish, or birds etc
• only a small fraction of fish are available to us
• unfortunately, we have the technology to harvest almost 100% of fish in an area--where will the seeds of next years crop come from?

If Malthus pointed out the limits of natural resources, John Stuart Mill pointed out the value of Intangible Resources:

• these are things like natural beauty, open space, wilderness
• also includes biodiversity (though this can have very tangible value)
• some would include humanistic values such as knowledge, freedom, spirituality, etc
• these things may get short shrift in a cost-benefit analysis because they are difficult to put a price tag on
4. Sustainable Development
1. the natural economy of a climax community can persist for millenia; the stability arises from four general principles:
0. stable ecosystems recycle matter
1. stable ecosystems use sunlight as their energy source
2. stable ecosystems maintain consumer population at a level that does not result in fatal overgrazing
3. stable ecosystems maintain biodiversity
• we have learned to mimic much in nature, perhaps we could learn from its efficiency
2. when the west was wild, economic growth was brought about by digging more and more out of the ground faster and faster
3. now that the hole is almost empty (and the dump is full!) we need to dig less and less out of the ground and do it more and more cleverly
4. strategies to help promote sustainable development:

Help the poor (redistribute the wealth).	Recycle.
Consider the locals.	Devise new management and regulatory schemes so that it pays to manage resources with an eye on the horizon.
Include external costs (including depletion).	Build valuable things that don’t consume much.