Lecture Notes on Resource and Environmental Economics (The Economics of Non-Market Goods and Resources Book 16)

This book, based on lectures on natural and environmental resource economics, offers a nontechnical exposition of the modern theory of sustainability in the presence of resource scarcity. It applies an alternative take on environmental economics, focusing on the economics of the natural environment, including development, computation, and potential empirical importance of the concept of option value, as opposed to the standard treatment of the economics of pollution control. The approach throughout is primarily conceptual and theoretical, though empirical estimation and results are sometimes noted. Mathematics, ranging from elementary calculus to more formal dynamic optimization, is used, especially in the early chapters on the optimal management of exhaustible and renewable resources, but results are always given an economic interpretation. Diagrams and numerical examples are also used extensively. The first chapter introduces the classical economists as the first resource economists, in their discussion of the implications of a limited natural resource base (agricultural land) for the evolution of the wider economy. A later chapter returns to the same concerns, along with others stimulated by the energy and environmental "crises" of the 1970s and beyond. One section considers alternative measures of resource scarcity and empirical findings on their behavior over time. Another introduces the modern concept of sustainability with an intuitive development of the analytics. A chapter on the dynamics of environmental management motivates the concept of option value, shows how to compute it, then demonstrates its importance in an illustrative empirical example. The closing chapter, on climate change, first projects future changes and potential catastrophic impacts, then discusses the policy relevance of both option value and discounting for the very long run. This book is intended for resource and environmental economists and can be read by interested graduate and advanced undergraduate students in the field as well. Preface 6 Contents 11 1 The Classical Roots of Resource Economics 14 1.1 Introduction: Why Do We Study Resource Economics? 14 1.2 The Classical Economists: Robert Malthus 15 1.3 The Classical Economists: David Ricardo 16 1.4 The Computation of Rent: Example 18 1.5 The Classical Economists: John Stuart Mill 19 2 Optimal Depletion of Exhaustible Resources 20 2.1 Introduction to Discounting 21 2.1.1 Estimating the Present Value of Investment Streams 23 2.2 Basic Concepts and an Informal Derivation of Optimal Depletion Rates 24 2.3 Formal Derivation of Optimal Depletion and the Welfare Theorem 26 2.3.1 The Planner's Problem 26 2.3.2 The Firm's Problem 28 2.4 Optimal Control* 29 2.4.1 Discounting 31 2.5 Optimal Depletion Using Optimal Control* 32 2.5.1 Efficient Allocation 32 2.5.2 Competitive Equilibrium 34 2.5.3 Equilibrium, Efficiency, and Non-convexity 35 2.6 Assumptions Underlying the Welfare Theorem 42 2.6.1 Perfect Competition 42 2.6.2 Advanced* 44 2.6.3 No Externalities 46 2.6.4 Advanced* 46 2.6.5 Private and Social Discount Rates Are the Same 47 2.6.6 Perfect Information 48 2.6.7 Anchoring the Price Path 49 2.7 Concluding Remarks on Theory 51 2.8 A Note on Empirical Verification of the Basic Model ... 51 2.9 Numerical Examples 53 2.9.1 Base Case 53 2.9.2 Unlimited Stock 54 2.9.3 No Discounting 55 2.9.4 Taxes 55 2.9.5 Expected Demand 57 2.9.6 Externalities 57 2.9.7 Substitutes 57 2.9.8 Depletion over Many Periods 58 2.9.9 Depletion over Many Periods: Continuous Time 59 2.9.10 Incorrectly Anticipated Stock 60 2.9.11 Incorrectly Anticipated Choke Price 61 2.10 Some Last Notes on Scarcity Rents 62 2.11 Backstop Technologies 63 2.11.1 Nordhaus Energy Model and Beyond 66 3 Renewable Resources 71 3.1 Continuous Time 72 3.2 Analytics of Optimal Timber Harvesting 74 3.2.1 One-Shot Harvest 75 3.2.2 Repeated Harvests 76 3.2.3 A Numerical Example Comparing One-Shot and Repeated Harvesting 77 3.2.4 Biological ``Optimum'': The Maximum Sustainable Yield (MSY) 79 3.2.5 The Standing Forest Has Value 82 3.3 Optimal Control of a Generic Renewable Resource* 83 4 Environmental Resources: Dynamics, Irreversibility and Option Value 87 4.1 Introduction: The Transition from Extractive to in Situ Resources 87 4.2 Irreversibility in Economics and in Environmental Processes 89 4.3 Evaluating Irreversible Investments 91 4.4 Investment Under Uncertainty and Irreversibility 92 4.5 Computation of Option Value 94 4.5.1 No Expectations of Learning 94 4.5.2 Anticipating Learning 95 4.6 Application of Uncertainty and Irreversibility: Valuation ... 97 4.6.1 A Framework for Valuation 97 4.6.2 An Illustrative Application 100 5 Resources, Growth and Sustainability 104 5.1 Resource Scarcity 105 5.1.1 Physical Measures of Scarcity 106 5.1.2 Economic Measures of Scarcity 108 5.2 Limits to Growth 121 5.3 Sustainability: An Intuitive Approach 123 5.3.1 Sustainability: A Rigorous Formulation and Preliminary Empirical Results 125 6 Climate: The Ultimate Resource? 128 6.1 Introduction 129 6.2 Climate Change Projections 132 6.3 Potential Impacts and Problems of Estimation 136 6.3.1 The Importance of Non-linearity in Modeling Climate Change Impacts 137 6.3.2 Impacts on the Environment, Extreme Events, and Capital Losses 140 6.4 Discounting 142 6.5 Irreversibilities 144 6.6 Catastrophic Climate Change in Context 145 6.7 Implications for Climate Policy 149 6.8 Policy Instruments 151 Appendix References 153 153 This book, based on lectures on natural and environmental resource economics, offers a nontechnical exposition of the modern theory of sustainability in the presence of resource scarcity. It applies an alternative take on environmental economics, focusing on the economics of the natural environment, including development, computation, and potential empirical importance of the concept of option value, as opposed to the standard treatment of the economics of pollution control. The approach throughout is primarily conceptual and theoretical, though empirical estimation and results are sometimes noted. Mathematics, ranging from elementary calculus to more formal dynamic optimization, is used, especially in the early chapters on the optimal management of exhaustible and renewable resources, but results are always given an economic interpretation. Diagrams and numerical examples are also used extensively. The first chapter introduces the classical economists as the first resource economists, in their discussion of the implications of a limited natural resource base (agricultural land) for the evolution of the wider economy. A later chapter returns to the same concerns, along with others stimulated by the energy and environmental "crises" of the 1970s and beyond. One section considers alternative measures of resource scarcity and empirical findings on their behavior over time. Another introduces the modern concept of sustainability with an intuitive development of the analytics. A chapter on the dynamics of environmental management motivates the concept of option value, shows how to compute it, then demonstrates its importance in an illustrative empirical example. The closing chapter, on climate change, first projects future changes and potential catastrophic impacts, then discusses the policy relevance of both option value and discounting for the very long run. This book is intended for resource and environmental economists and can be read by interested graduate and a dvanced undergraduate students in the field as well Front Matter ....Pages i-xiii The Classical Roots of Resource Economics (Anthony C. Fisher)....Pages 1-6 Optimal Depletion of Exhaustible Resources (Anthony C. Fisher)....Pages 7-57 Renewable Resources (Anthony C. Fisher)....Pages 59-74 Environmental Resources: Dynamics, Irreversibility and Option Value (Anthony C. Fisher)....Pages 75-91 Resources, Growth and Sustainability (Anthony C. Fisher)....Pages 93-116 Climate: The Ultimate Resource? (Anthony C. Fisher)....Pages 117-141 Back Matter ....Pages 143-148