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8/13/2019 EEP101 Lecture 14 NR
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EEP 101/ECON 125Lecture 14:
Natural Resources (NR)
David Zilberman
UC Berkeley
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The 2003-08 food commodity
price boom
The food commodity price boom substantiallyimpacted global economic activity. It affected developing nations by impacting real
output, the balance of payments, government
budgetary positions and most importantly the wellbeing of the very poor.
It also affected developed countries, by transmittingbusiness cycle disturbances and creating inflationarypressures.
Can we identify the main cause of this pricespike?
World Bank, March 2010
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Commodity price trends:
The big picture
World Bank, March 2010Source: Trostle2008
During the
21stcentury,commodity
prices spiked
to new highs
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Crop price trends
World Bank, March 2010
This report
focuses oncrop prices
from 2002 to
2007
Data source: IMF primary commodity price database
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Crop price trends
World Bank, March 2010
2002 2003 2004 2005 2006 2007 2008
corn 11% 17% 25% 10% 35% 82% 149%
soybean 11% 34% 60% 32% 30% 81% 163%
rapeseed -15% 3% 40% 99%
rice 11% 13% 38% 64% 75% 89% 293%
wheat 16% 15% 24% 22% 54% 103% 166%
Cumulative increase in world price (in 2005 US$) with respect
to 2001
Data source: IMF primary commodity price database
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Is biofuel the culprit?*
World Bank, March 2010
Source Estimate Commodity Time period
World Bank (April
2008)
75 % global food index January 2002February 2008
IFPRI (May 2008) 39 %
21-22 %
corn
rice & wheat
20002007
2000
2007OECD-FAO (May
2008)
42 %
34 %
24 %
coarse grains
vegetable oils
wheat
20082017
20082017
20082017
Collins (June 2008) 25-60 %
19-26 %
corn
US retail food
20062008
20062008
Glauber (June 2008) 23-31 %10 %
4-5 %
commoditiesglobal food index
US retail food
April 2007
April 2008April 2007April 2008
JanuaryApril 2008
CEA (May 2008) 35 %
3 %
corn
global food index
March 2007March 2008
March 2007March 2008
Rajagopal et al. (2009) 15-28%
10-20%
Corn
soybean
2007
*Wiebe, 2009, in The Biofuel Situation and Policies in Developing Countries
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Review of Renewable Vs. Non Renewable
Nonrenewable resources (mineral, fossil water,remnants of ancient civilizations, old growthforest, dead things).
Renewable resources (fisheries, forests, grasslands,water systems, living things).
Many renewable resources and most nonrenewableones are exhaustible.
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Analysis of dynamic systems Natural resource management is control and direction of dynamic
systems. Policies affect the evolution of populations and/or resourceinventories
The indicators of the situation of dynamic systems are statevariables-
Number of fish in a lake at a moment of time
Volume of water in an aquifer
Policy makers affect control variables
Size of harvest Price of water
Systems are affected by random shocks
Weather Pest infestations
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Quanti f ication of NR systems
Measurement of dynamics systems is challenging counting fish is not easy
NR resource systems may be heterogeneous trees and fish of different sizes, of different ages, and at different
locations
minerals of different qualities at varying locations
The art of modeling identifies crucial features of thesystem and integrates simplicity with realism
Models are approximations that are subject to error
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Applying Our Knowledge of
I nterest Rates
Higher interest rates lead to increased mining or
harvesting
Resource owners that have to pay high interest for
funds are more likely to mine resources & sell them
than resource owners who face low interest rates
Poor individuals with heavy credit constraints are more
likely to mine their resources
Income & credit support for the poor reduce NR mining
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Net discounted present value (NPV)
Discounting to time 0 is used for comparing income
of different periods
The objective of resource management programs are
to maximize the sum of discounted values of all net
benefits over time (Net Benefits of period 1, plus 2, plus 3, etc.)
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Example: Computing NPV
If we have earned
55 dollars at first period
60.5 dollars at period two
If the discount rate is 10% The NPV is 100 Dollars
(55/1.1=50, 60.5/(1.1*1.1))
If interest rate is 20%the NPV is
45.83 which is equal to 55/1.2
+ 42.03 Which is equal to 60.55/(1.2*1.2)
= 87.86
Higher interest rates reduce value of future earning
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Non renewable resources The actual stock of non renewable resources is declining over
time, but known reserves may increase because of discoveries
Perceived shortages and improved discovery technologies trigger
searches and lead to discoveries
Known oil reserves are estimated to last 40-80 years, the same
estimate was given in the 1940s
Still oil and natural gas reserves may run out
Non renewable resources are rarely depleted, but may become
too expensive to mine
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Factor determining extraction: demand
Demand is reflecting marginal value of resource in applications (value
of oil in transportation and heating)
Higher incomes and lower prices increase demand
Demand increases with increased population
It may be reduced by introduction and adoption of resource
conserving technologies (fuel efficient cars)
It is reduced by back stop technologies (solar energy)
Demand can be reduced by
Taxes
Population policies
R&D
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Other factors determining extraction
Extraction cost- reduced mining or harvesting cost or improved
infrastructure (roads) increase extraction
Recycling- alternative supply sources reduce extraction
Known Reserves (more reserves increase extraction)
Market structure
Cartels extract less than competitive producers
Open access result in excessive mining
Regulation and policies
Technology control (restriction on use of explosives)
Zoning ( do not drill in Alaska)
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Generic Model Marginal Mining cost. MNC(x) .
Marginal future cost (User costs).MFC(x). The future costrepresents loss of future opportunities by present extraction.
Externality cost.MEC
C =Optimalallocation
A=Allocation
under open
access
B=Allocation
without
considering
externality costs
A
B
C
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Alternative Allocations Open access and no regulation will result in excessive
resource use (A- Pollution & future ignored)
Competitive supply by firms with well definedresources, ownership rights without pollution control
still result in excessive mining (B)
Competitive supply when ownership is well defined andpollution is taxed results in optimum (C)
Cartel may under provide resources (if price undermonopoly is greater than at C) or under provide if
pollution cost great than the cartel
s price increase.
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Elements of a Resource Policy (1) Establishing private prosperity for the resource. This prevents the open
access problem and moves from point A to point B in Figure 1.
(2) Externality control. Including tax on the resource (leading to a transition
from B to C). Gasoline tax in U.S. can
affect Climate change dynamics
reduce air pollution
Resource taxes also lead to
adoption of resource efficient technologies
emergence of backstop technologies (recycling when appropriate)
(3) Support to Backstop research
(4) Subsidy for adoption of resource efficient technologies( fuel efficientcars ublic trans ort
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Renewable resources
Growth provides a base for harvest without ultimate
depletion.
Change of stock = Growth minusharvest
At a Steady state (sustainable solution)
Growth = Harvest
There are many sustainable solutions, the one that
maximizes discounted net benefits is optimal
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Growth as function of stock We have steady state (harvest =growth) at B,M,C,X
G
g
r
o
w
th
Resource Stock
M=Maximum Sustainable yield
X=maximum Sustainable Stock
M
X
B C
B= low stock sustainable outcome
C = High stock sustainable outcome
O
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Alternative Sustainable Outcomes Extinction- no stock on growth
X=maximum Sustainable Stock (All food goes for consumption notgrowth)
M=Maximum Sustainable yield (Between O and X)
B= low stock sustainable outcome (Between O & M)
C = High stock sustainable outcome (Between M &X)
Maximum Sustainable yield is not necessarily optimal
Higher stocks reduce harvesting costs
Lower stocks allow more extraction
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Major Contr ibutors to extraction:Demand, Open access,Extraction technology
Resulting elements of Extraction control policy Reduction of demand
taxes, subsidies to resource use reducing technologies
Control of access establishing property rights
requiring licenses to extract
limiting harvesting season
Regulation of Extraction technology restricting size of equipment
restricting total harvesting capacity
regulating externality caused by harvesting (By catch)
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Multiple benef i ts of resources Resources (forests, wetlands, etc.) provide multiple services
(recreation, bio-diversity, etc.)
Harvesting reduces alternative environmental benefits
One solution: taxation of harvested resources
Alternatives: subsidies for conservation (not harvesting), debt
for nature, payment for environmental services
Marketing of environmental amenities (Ecotourism, bio-
prospecting, tropical nuts )
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I ntensif ication and conservation
Agricultural intensifications (fertilizers,chemicals)-increases yield per acre and reduces utilized land and
deforestation
Aquaculture provides substitutes for fishing, but has its
own environmental side effects (to be controlled)
Forest plantation reduces pressure on natural forest
Husbandry of animals (rhinos) would reduce pressure for
tasks and other features of wild animals
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Fishery Issues
International water. There are international agreements and
evolving laws of the sea,yet, open access problems continue
Monitoring problems. Countries establish transferable fishing
permits. Monitoring and enforcement may limit their effectiveness
Regulation of timing. The size, number of boats and duration offishing may be regulated. Limitations:
(i) It leads to overinvestment in equipment.
(ii) Frozen fish are inferior to fresh ones.
Technology controls. Some techniques (use of explosive, fishing
with fine mesh nets) have future and externality costs
Aquaculture and marine culture.Provide alternative sources of
fish, but have externality costs
P0
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Non renewable resource prices
Prices are indicators of scarcity
Prices of non renewable resources decline when known
resources grow faster than use
Prices of most non renewable resources has decline
Higher interest rates lead to lower prices at present and
higher future prices (they increase present mining)
Higher mining cost increases prices but reduces price
changes over time
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Optimal price of resource over time
with zero extraction cost
Pt
Pt
Pt
1
t
r2> r1
t*
r1
Figure 3
Higher interest rate
reduces initial price
BUT
Increased rate of
price changes whenstock is constant
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More mining under higher interest rates in earlier per iods and
less mining beyondt=t*
t*t
xt
xt1
2
Figure 4
Mining
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Price Dynamics of Renewable Resources
The rate of the price change is affected by: The discount rate tends to increase price over time.
Rate of resource population growth tends to reduce price over time
(as supply increases)
Extraction cost factor dampens the other two
Demand growth increases prices
New resource sources tend to reduce prices
Prices of most renewable resources have decline over time
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