ECON 4925
Resource Economics
Autumn 2010
Lecture 1 Introduction
Lecturer:
Finn R. Førsund
4925 Lecture 1
1
Perman et al. Chapter 1.2.1
• Classical economists: 1700-1800 century
– Development of natural resource economics
– Adam Smith, Thomas Malthus, David Ricardo,
John Stuart Mill
• Economic growth: importance of natural
resources (land)
• Living standards in the long run subject to
constraints (land)
• Diminishing returns , inevitability of a
stationary state
ECON 4925
2
Perman et al. Chapter 1.2.1
• Adam Smith: markets and allocation of
resources, invisible hand
• Malthus: population growth geometric and
food output growth arithmetic
• Ricardo: subsistence wage level in steady
state, land in varying quality
• John Stuart Mill: diminishing returns, but also
growth of knowledge and technical progress.
Amenity values, first environmental
economist?
ECON 4925
3
Perman et al. Chapter 1.2.2
• Neoclassical economics: marginal theory and
value in exchange
• 1870+, Jevons, Menger, Marshall (consumer
surplus), Walras (general equilibrium)
• Production- and utility functions
• Keynes: short-run use of resources
• Neoclassical growth theory: absence of
natural resources, introduced from 1970+
ECON 4925
4
Perman et al. Chapter 1.2.3
Welfare economics
• Rankings of allocation must be based on
ethical criterions
• Utilitarian moral philosophy, Hume, Bentham,
Mill. Weighted average of the total utility
levels enjoyed by all individuals in the society
• Pareto optimality (1897)
ECON 4925
5
Perman et al. Chapter 2
• Can the global economic system continue to
grow without undermining the natural
systems, which are its ultimate foundation?
• Can poverty be alleviated in such ways that do
not affect the natural environment in such a
way that future economic prospects suffer
– Interrelationship between poverty, economic development
and the state of the natural environment
– World Commission on Environment and Development
1987 Our Common Future
ECON 4925
6
Issues in resource economics
• Types of resources
– Non-renewables
• Minerals, oil, gas, coal
– Renewables
• Fish, forests, water
• Questions to be studied
– Optimal depletion of non-renewables
– Optimal harvesting of renewables
• Sustainability
– Can the global economic system continue to grow
without undermining the natural systems, which
are its ultimate foundation?
– Can poverty be alleviated in such ways that do not
affect the natural environment in such a way that
future economic prospects suffer
– Interrelationship between poverty, economic
development and the state of the natural
environment
– World Commission on Environment and
Development 1987 Our Common Future
• Aggregate modelling
– Social planner
• Discounting
– Care less about consumption tomorrow than
today,  > 0, pure rate of time preference,
defective telescopic faculty (Pigou)
– One believes tomorrow’s consumer will be better
off than today’s C / C  0
Perman et al. Chapter 3. Utilitarism
• Utility discount rate ρ and consumption
discount
rate, r
T
W
 t
U
(
C
)
e
 t dt
t 0
• Discounting discriminating against future
generations?
• Rising consumption over time may be
consistent with positive discounting
U ''(Ct )C
C
r    ,   
C
U '(Ct )
ECON 4925
10
Perman et al. Chapter 3 (11).
• Derivation
d
U (Ct )e  t   U '(Ct )e  t
dCt
d
dC  t
U '(Ct )e t  U ''(Ct )
e  U '(Ct )e  t
U ''(Ct )C
dt
dt



U '(Ct )e t
U '(Ct )e  t
U '(Ct )
d
Ct e  rt   e  rt
dCt
d  rt
e 
re rt
dt
  rt  r
e rt
e
U ''(Ct )C
C
   r  r    
U '(Ct )
C
ECON 4925
11
Rules within resource economics
• Two intertemporal allocation rules have
attracted particular attention:
the Hotelling rule and the Hartwick rule
• The Hotelling rule:
– No-arbitrage possibility condition that every
efficient resource utilisation path has to meet.
The net price of an exhaustible resource must
grow at a rate that equal the interest rate
ECON 4925
12
• The Hartwick rule
– Invest proceeds from resource extraction such
that total capital is constant
• The Hartwick result
– The investment rule is necessary but not
sufficient for constant sustainable
consumption
• The relevance of the Hartwick rule for
sustainability
– Must have substitution between natural capital
and man-made capital
ECON 4925
13
Further issues
• Policy instruments to achieve optimality
– Taxes
– Distribution; taxing Ricardian rents
• Markt forms
– Monopoly
– Free competition
• Role of ownership for utilisation of commonpool renewable resources
• Main types of models
– Cake - eating model
• limited amount of non-renewable resources
• Hotelling’s rule
– Limited non-renewable resources, production of
man-made resources
– Biological growth of renewable resources
• Modelling the growth process
• Role of steady state and sustainability
• Necessary mathematical skills
– Optimal control theory
– Dynamic programming
The cake-eating model
• A two –period model, consumption C of a
finite resource during the two periods
– Discounting of utility in period 2 with factor

1
1
1 
• Problem: when to eat the cake and how much
• Solution
Max {U (C1 )  U (C2 )}
s.t.
C1  C2  So

{U (C1 )   U ( So  C1 )}  0  U1   U 2  0
C
• Hotelling’s rule
U 2  U1 U 2   U 2
1


1  
U1
 U 2

• Generalisation to depletion on the interval
to – t1 of a resource consuming Rt at time t
t1
Max
s.t.

U ( Rt )e   t dt
t  t0
t
St  So 


R d  St   Rt
 to
• Introducing a consumption good produced using
resources and capital
t1
Max

U (Ct )e   t dt
t  t0
s.t.
St   Rt
K t  F ( Rt , K t )  Ct
• Biological growth of a renewable resource
St
St  G ( St )  g (1 
) St
Smax
• Objective function:
– Maximising present value of net utility of harvest
of the resource, specifying e.g. a current variable
cost function of harvesting