178.307 Markets, Firms and Consumers. Lecture 7- Natural Resource Economics. Introduction. Many firms employ natural resources Non-renewable resources Coal Iron ore Oil Renewable resources Fish Forests Distinction between exhaustible and non-exhaustible is not preferred. Time
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Lecture 7- Natural Resource Economics
The efficient use of natural resources depends on time.
This dynamic nature makes these inputs different from other inputs (like capital).
Many natural resources are not privately owned.
Forests, fisheries and mineral deposits are often owned by the state.What makes Natural Resources different?
The last equation is expressed in continuous time.
This defines the optimal extraction of a non-renewable resource (Hotelling, 1931).
This fundamental rule is difficult to put into practice.
Some empirical studies provide some support for Hotelling’s Rule.
In strong form it assumes perfect foresight by firms.
Technological change must also be accounted for.Hotelling’s Rule Expanded
Post-war studies came up with surprising results.
Prices (fundamental measure of scarcity) for natural resources have tended to fall.
A price increase indicated in late 70s.
Prices have since fallen again
Simon’s BetAre natural resources getting depleted?
OECD oil-consumption peaked in 1978.
Horizontal bores in oil-wells
Fibre-optics, communication satellites- less copper.How does the Market Economy solve scarcity?
The bid exceeds the value of the tract and the firm loses money.
The value of the tract is less than expert’s estimate.
The firm is disappointed.
Solving for optimal bid is not trivial.
More bidders implies you must bid aggressively to win.
More aggressive bidding means you are more likely to overestimate value.
Winner’s Curse has been applied to other problems (IPOs).Winner’s Curse
This occurs because the producer faces the same problem in every rotation, hence becomes a convergent geometric progression.
Property rights that are either unenforced or unenforceable lead to open access problems.
Many fisheries managed as public property.
Incentives to over-harvest weakly influenced by regulations.
Enforcement costly and imperfect
Fishers subsidised!Public Property
Thaler (1997) Anomalies: The Winner’s Curse.