Natural Resource Economics:
An Overview
2 period model
MUC rises at rate of discount
 In period 2, MUC 1+r as large as in period 1
 Suggests that efficiency involves rising MUC
and falling Q
 Generalize to longer time periods
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MUC
In order for an owner of resource to be
indifferent as to the period in which they
sell, PV of the MUC must be the same in
all periods.
 This means that MUC of an exhaustible
resource will increase with the discount
rate.
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price equation
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efficiency pricing:
Pt = MECt + MUCt
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where
 MEC
refers to Marginal Extraction Cost
 MUC refers to Marginal User Cost
MUC and MEC
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The existence of MUC means that price will always
be different from MEC.
MUC = P – MEC (net benefit)
MUC is a form of scarcity rent
If no scarcity, MUC = 0
If scarcity, MUC = PV of marginal net benefit in each
time period
If MEC = 0
 Competitive firm MUC = price = MB
 Monopoly MUC = MR = MB
social planner vs. monopolist
how does allocation differ with respect to
planner?
 “social planner”: maximize net benefit to
society
 monopoly: maximize profit (producer
surplus)
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excel example:
dynamically efficient extraction of an exhaustible
resource
100 tons of coal
 2 periods
 MEC = 0
 Demand each period P = 500 – 0.5q
 How will 100 tons be allocated over 2
periods?
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2 ways to analyze
1.
2.
maximize social welfare (“benevolent
social planner”): CS + PS
maximize PS: monopolist maxes PV
profit
using excel solver
enter equations
 enter parameters
 specify changing cells
 specify objective cell
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constant MEC with no substitute
MUC and Q over time
efficient MUC rises, reflecting increasing
scarcity
 in response, quantity extracted falls over
time until reaching zero, when total MC =
highest WTP
 efficiency requires smooth transition to
exhaustion of resource
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transition to a renewable substitute
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backstop resource, available at constant MEC (e.g.,
solar)
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when is it efficient to switch to backstop?
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when cheaper to do so!
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with no backstop, max WTP (“choke price”) sets limit on
total MC
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backstop’s MEC now sets upper limit
switch point
prior to switch point, exhaustible resource
is cheaper
 at the switch point, MC of exhaustible
resource (including MUC) rises to meet
MC of substitute
 consumption of renewable begins
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exploration and discovery
expensive
 as more easily discovered resources are
exhausted, search is less hospitable
environs (bottom of ocean, deep within
earth)
 MC of exploration will rise over time
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