eep101 lecture 14 nr

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


This report

focuses oncrop prices

from 2002 to

2007

Data source: IMF primary commodity price database


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Crop price trends


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?*


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

eep101 lecture 14 nr

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