ECON 4925

Resource Economics
Autumn 2010
Lecture 1 Introduction
Lecturer:
Finn R. Frsund

4925 Lecture 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

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

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

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

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

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)
C&/ C 0
One believes tomorrows
consumer will
be better off than todays

Perman et al. Chapter 3.

Utilitarism

Utility discount rate 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

common-pool renewable resources

 Main types of models

Cake - eating model
limited amount of non-renewable resources
Hotellings 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
factor

of

1
1
1utility

in period 2 with

Max {U (C1 ) U (C2 )}

s.t.
C1 C2 So

Problem: when to eat the cake and

how much
{U (C ) U ( S C )} 0 U U 0
C

Solution

U 2 U1 U 2 U 2
1

1
U1
U 2

 Generalisation to depletion on the

interval
to t1 of a resource
t1

t
consumingMax
Rt at
U ( Rtime
dt t
t )e

s.t.

t t0

St So

R d S&t Rt

to

Introducing a consumption good produced

t
using resources
and
capital
t
1

Max

U (C )e
t

t t0

dt

s.t.
S&t Rt
K&t F ( Rt , K t ) Ct

 Biological growth of a renewable

resourceS& G ( S ) g (1 St ) S
t

Smax

Objective function:
Maximising present value of net utility of
harvest of the resource, specifying e.g. a
current variable cost function of
harvesting