Lecture Notes for Economics 435: Economics of Resources
Prepared by Gunnar Knapp, Professor of Economics
January 7, 2000
[Slightly revised by S. Colt, January 2004]
DEFINING "RESOURCES"
Throughout this course, we will use the term “resources” as a shorthand for “natural
resources.” (Anyone who has taken economic principles knows that in economics, the
term “resources” is often used to mean any productive input, such as labor, capital,
knowledge, or entrepreneurship.) We're not going to worry about coming up with some
precise definition of [natural!] resources. Simply be aware that "resources" may mean
different things to different people, and the term has meant different things at different
times.
"Resources" may be very broadly defined as naturally occurring inputs to production or
consumption. This definition of resources can be extended to include any component of
the natural environment or ecosystem. It is not restricted to inputs to physical production
or consumption, but can include inputs to "amenity" consumption, such as wilderness or
scenery. It can include potential future inputs to production or consumption. "Resources"
are usually considered the third broad kind of input to production, along with "labor" and
"capital."
One characteristic of many [natural!] resources is that use in one period affects the
options for use in other periods: oil used today won't be available tomorrow. So time is
very important in the economic analysis of resources. Note that time is important even
for many "renewable" resources. Big harvests of fish this year may mean that there are
fewer fish to harvest next year. Cutting trees this year may mean that there are no more
trees to be cut (on the land where we harvested) for another 30, or 50, or 100 years.
What we mean by "resources" changes over time. Over time, with economic and
technological change, there are changes in which "resources" we consider important--or
even include in our definition of "resources." For example, tall straight pine trees, which
were formerly used as masts for sailing ships, used to be considered a vital strategic
resource for England.
In contrast, other resources which were unknown or unimportant only a few decades ago
are now considered vital. Examples include uranium, the ozone layer, biological diversity
(for example, preserving different strains of wheat which may be used in developing new
disease-resistant crops), and wilderness.
Resource importance derives from resource scarcity. Why do resources change in
importance? One major factor is scarcity. Resources become important--and we begin
to think of them as "resources"--when they go from a condition of abundance to a
condition of scarcity.
Economics of Resources Lecture Notes: Defining Resources, page 1
Technically, economists define "abundance" as a situation in which the marginal
opportunity cost to society of resource use is zero, while "scarcity" is a situation in which
the marginal cost to society of resource use is not zero. (In this definition, the "marginal
cost to society" does not include the cost of extraction, only the loss due to the fact that
some of the resource has been used and is therefore no longer available for use in the
future.) Put more simply, scarcity means that more consumption right now requires less
consumption at some other times.
Two examples of "abundant" resources are water in a rain forest and trees on the east
coast of frontier America [meaning years 1600-1650]. In both of these situations,
consuming the resources at the margin --in relatively small incremental units--costs
society nothing. We need not consume less water tomorrow in the rain forest, or less
wood tomorrow in frontier America, by consuming some today, because there is more
than we want to use today and tomorrow and for the foreseeable future.
This does not mean that abundant resources are costless to consume In fact, the
extraction costs may be very high. It may cost a lot of labor to cut down a tree in frontier
America. But if there are far more trees than we can use (or wish to save for our
descendants), they are abundant rather than scarce--and we may not even think of them as
a resource.
[It also doesn’t mean that abundant resources are not valuable to those who use them. If
you are about to die of thirst and you come to a huge river with lots of fresh clean water
flowing past, the first gallon of water that you would drink from that river would be
immensely valuable. But it can still be considered abundant by this definition.]
[Thought question: if an abundant resource is so valuable to its users, can it be SOLD at a
positive price?]
Times change. As the population grows, and the resource base declines, there comes a
point when resources change from being abundant to being scarce. There comes a time,
in frontier America, when cutting down any more trees is going to mean that either we or
our children are going to have fewer trees. Now the resource is scarce, and we begin to
be aware of it.
Changing from abundance to scarcity can arise either because of changes in supply or
changes in demand. Uranium began to be considered a resource not because we used up
so much of it, but rather because we began to value it more: to demand more of it.
Economics of Resources Lecture Notes: Defining Resources, page 2