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exam 2 review. resource economics. nonrenewable vs. renewable maximize pv of net benefit renewable includes growth functions characterize efficient allocations compare to market allocations discuss policy to make market allocations more efficient. start with the price equation.

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Resource economics
resource economics

  • nonrenewable vs. renewable

    • maximize pv of net benefit

    • renewable includes growth functions

  • characterize efficient allocations

  • compare to market allocations

  • discuss policy to make market allocations more efficient


Start with the price equation
start with the price equation

  • efficiency pricing:

    Pt = MECt +MUCt

  • where

    • MEC: Marginal Extraction Cost

    • MUC: Marginal User Cost


Muc and q over time
MUC and Q over time

  • efficient MUC rises, reflecting increasing scarcity

  • in response, Q extracted falls over time until reaching zero, when total MC = highest WTP (“choke price”) or reach backstop MC

  • efficiency requires smooth transition to exhaustion of resource



Energy efficient vs market outcomes
energy: efficient vs. market outcomes

energy: efficient vs. market outcomes

vulnerability premium


water efficient allocations:surface vs. groundwater

  • surface water

    • how to allocate a renewable supply among competing uses

    • intergenerational effects less important (future supplies depend on natural phenomenon, e.g. rain, rather than current allocation)

  • groundwater

    • withdrawing now affects future supply


Efficient allocation surface water
efficient allocation: surface water

  • balance btw users

    • marginal net benefit equal across users

  • handle variability

    • above-average and below-average flows must be accommodated


Efficient allocation groundwater
efficient allocation: groundwater

  • if withdrawal > recharge, eventual exhaust resource

  • MEC rises over time as water table falls

  • pumping would stop:

    • no water left

    • MC pumping > benefit of water or MC of backstop resource (desalination)

  • price rises over time until choke price or switch point


Utilities pricing inverted block seasonal rates potentially efficient
utilities pricing: inverted block & seasonal rates(potentially efficient)


forests: biological harvest rule

  • MAI = cumulative volume end of decade /

    cumulative yrs of growth

  • harvest when MAI maximized



Economic harvesting rule
economic harvesting rule

  • harvest at age that maximizes PV of net benefits

  • planting costs

    • borne immediately

    • no discounting

  • harvesting costs

    • time of harvest

    • discounted


Sample problem
sample problem

Age Volume (cubic ft)

11 700

21 1,000

31 3,000 when to harvest

41 6,000 using biological rule?

51 8,000 using economic rule?

Price: $2

Planting cost: $1,000

Harvest cost: $0.50

Discount rate: 3%


Optimal harvest age
optimal harvest age

  • discounting shortens optimal harvest time

    • less tolerant of slow timber growth

    • comparing no harvest (increase in value of timber) to harvest (sell and invest)

  • high discount rates also destroy incentive to replant


Fisheries biological vs economic harvest
fisheries: biological vs. economic harvest

  • biology: “maximum sustainable yield” (MSY)

    • yields maximum growth

    • largest catch that can be perpetually sustained

  • economics: maximize net benefit


Too much effort policy responses
too much effort! policy responses

  • increase MC– require fishing farther from shore, use smaller nets, boats, or motors

    • but artificially increasing cost inefficient

  • total allowable catch – restrictions on effort or size of catch

    • monitoring, enforcement difficult, also creates race to catch

  • individual transferable quotas –quotas allocated, then trade

    • no race, allows most efficient fishers to buy rights from inefficient fishers


Sample problem1
sample problem

  • Costs fisher $20 to fish salmon

  • Salmon sells for $10

  • Harvest rate given X fishers is

    S = 30X-2X2

  • How many people will go fishing, how many salmon will be caught, and what are total profits under

    • Open access

    • Limited entry (how many fishers should be allowed to maximize profit?)


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