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Natural resource management and intertemporal/intergenerational choices. The problem of next generations Non-renewable resources: the problem of the discounted value Renewable resources: sustainable exploitation Sustainable and optimal exploitation (extraction) rate
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The problem of next generations
Non-renewable resources: the problem of the discounted value
Renewable resources: sustainable exploitation
Sustainable and optimal exploitation (extraction) rate
Access regime and “the tragedy of the commons”
So far, the problem of optimal allocation of an environmental good E (i.e., of pursuing the maximum net social benefit) has been worked out by comparing CURRENT costs and benefits associated to the use of this good.
This static representation, however, does not fit the actual concerns related to the use of many natural resources where costs and benefits differently occur anddistribute over time
We need to make explicit that these resources behave as stock that can be used either in the current period or in next periods. Therefore, choices about resource use have an inherent dynamic (intertemporal) dimension.Such dimensionconcerns two different aspects:
How future generations will use/demand this resource
How the resource stock evolves over time
The allocation problem thus becomes to find TODAY the optimal exploitation/extraction rate. Such optimal resource exploitation substantially differs for the two different kind of natural resources:
NON-RENEWABLE (EXHAUSTIBLE) RESOURCES: fossil energy, mineral resources, etc.
RENEWABLE RESOURCES: forestry resources, fishery resources, water resources etc.
In principle, the idea of optimality can be maintained: maximization of the Net Social Benefit. Now, however, the “society” is the aggregation of current and next generations and its net benefit is the difference between the flow of benefits B(E)tand of costs C(E)t over time:
Algebraic summation of such benefits and costs, however, incur the problem of comparing monetary values over different periods of time. This problem is tackled by comparing the current value of benefits and costs, therefore by discounting all values at the discount rate r.
Therefore, the maximization of the current (discounted) intertemporal net social benefit (SB0) (thus achieving the optimal allocation of E across generations/periods) is expressed as:
This is evident in the case of exhaustible resources:
Any generation will obtain a net benefit B(Q)t from resource extraction. Due to absolute scarcity, quantity used by time t generation is definitively missed for time (t+n) generations. Therefore, B(Q) t+n becomes an opportunity cost associated to B(Q)t; in other words, it is the option value of the resource itself.
Without an intergenerational coordination, in any period t there will be tendency to over-utilize the resource to the level Q* for which Bm(Q*)t = 0.
At such exploitation rate, however, there will correspond an opportunity cost for the following periods whose discounted value is B(Q*)t+1/(1+r). A generation that is not aware of this implicit cost implicitly assumes a very high discount rate that makes this opportunity cost negligible. Therefore, the discount rate in such context is somehow a measure of the degree of “egoism” of present generations with respect to future generations.
Let’s consider this problem of intergenerational coordination in an oversimplified situation (model): one good (E) and only two generations (t = 1, 2)
Optimal intertemporal extraction of exhaustible natural resources - 1
Optimal intertemporal extraction of exhaustible natural resources - 2
QT - Q1 = Q2 (expresses the extraction of second generation)
We can better appreciate this result graphically :
Optimal intertemporal extraction of exhaustible natural resources - 3
Optimal intergenerational allocation of stock QT under a non-null discount rate. The higher is r, the larger is the use of current generation (Q1), the lower the amount left to generation 2 (Q2)
Optimal intergenerational allocation of stock QT only when the discount rate is null (r = 0; no intertemporal preference).
Optimal use of current generation (Q1) under an infinite discount rate (r=∞) expressing the lack of intergenerational coordination
- Free Access
- Exclusive Access
free access vs. exclusive access rights - 1
free access vs. exclusive access rights - 2
of the Commons
the access tax