Introduction to Natural Resources Economics

Sukhdeep Singh
 Some important issues
• Use of natural resources as inputs in the production process and for
consumption
• Resource adequacy: concerns related to sufficient supply of natural resources
in the future
• While the concern related to resource adequacy was mostly local before the
modern industrial revolution, it is increasingly becoming more global
• Modern economies are more energy intensive  Greater burden on natural
resources
 Prices as signals
• Law of demand and supply
• Prices as signals
• Increased energy prices resulted in (limited) energy conservation
behaviour
Global price of energy Index
 Two alternative views about non-renewable
resources
• Pessimist view
 Thomas Malthus: Growth in the human population will exhaust the ability of nature to provide sustenance
 Simulation studies have predicted a decline in the output of modern economies due to resource scarcity
• Optimism view
 Humans have the capability to deal with resource scarcity (e.g. by finding substitutes or controlling the population)
 Historical evidence
1) The humans were historically able to find substitutes (e.g. wood, coal, petroleum etc)
2) Technological improvements helped in dealing with scarcity (e.g. green revolution)
3) Tendency to adopt energy conservation behaviour
 There may be a need for short-term adjustments, major problems are unlikely
 Long-run price changes of resources
• Long-run tendency in case of prices of many natural resources is to
remain low
• Despite increasing demand due to demographic growth, due to impressive
technological changes, prices kept low
Long-run substitution
 The socially optimal rate of resource
utilization
• Economics seek to find optimum/best rate
• Optimum rate may depend on several factors such as the value of a particular resource in
alternative uses, rate of natural replenishment, technological improvements, expected
demographic trends
Criteria
1) Social efficiency: Maximum net benefits (Total benefits-total costs)
2) Sustainability: maintaining a value index of human or ecosystem welfare
3) Irreversibility: Avoid actions that may result in the destruction of unique natural resources
4) Fairness: Identifying actions that impact people in ways that can be considered equitable
 Natural Resource Policy
• Objective: To find ways to move toward optimum the rate should not be
too high or too low
• How the market economy (regulation-free) can result in resource
mismanagement 1) Private markets do not function effectively in all
situations (e.g. increasing number of luxury cars despite increasing
concern related to resource scarcity; private market may not protect
common forest areas)
• Misguided public policy
 Property rights
• Property rights may affect the use of and rate of utilization of natural
resources
• For instance, shift from open access and system of individual transferable
quotas has been introduced in several places to reduce pressure on marine
resources (right based fishing)
• Incentive effect: with adequate property rights, the owners have incentive
to preserve the value of their assets in long-run
 How do subsidies affect natural resource
utilization
• Energy subsides (common across the globe): may promote wasteful use in
certain cases (e.g. energy subsidies in Punjab affected land and
groundwater)
• Subsidies keep the energy prices artificially low (lack of price signals)
• Subsides on renewable energy may have a different outcome
 Natural resource accounting
• Conventional measures of national income (such as GDP/NDP) do not
incorporate natural resource depletion
• Depreciation is adjusted in the final numbers only in the case of human-
produced capital goods
• Natural resources are input to various production activities and provide
several non-traditional services (such as carbon fixation and nutrient
recycling); an important source of supply to recreation industry
 Natural resource accounting
• Quantitative depletion: resources used today may not be available for
future
• Qualitative depletion: ecosystem may be affected (such as soil erosion)
• Natural resource accounting: a way to estimate the value of ecosystem
services provided by a country’s natural resources and adjust standard
output measures accordingly in the national income accounts
 Debate between motives of extraction and
preservation
• Economists tend to observe the basic nature of the task
• Preserved resources are generally unique (irreversible loss); extracted
resources are not (loss can be reversed)
• Are their consequences of preservations?  it’s hard to answer as the market
values of the products from these resources are reflected in the prices,
whereas there is no similar market for preservation
• Concern: preservation has important implications for extraction industries
(e.g. employment loss)
 Cost-benefit analysis
• Cost-benefit analysis for decision making
• Preservation has a cost, there are trade-offs in real life
• The analysis involves the evaluation of natural resources and their
extraction to make a comparison
• Costs are values forgone if resources are preserved (not extracted);
benefits are values people place on resource preservation which is
adjusted for the probability that the resources will survive without
preservation
 Range of natural resource services
• Use value and non-use value

• Use value: Extractive (e.g. fuel, food from the land, irrigation) and non-
extractive (such as boating, backpacking in forests)
• Non-use values (scenic values)
Modelling resource use
 Modelling resource use
• In case of non-renewable resources i.e. no increment in the resource
• Certain resources may be renewable and non-renewable depending on circumstances (e.g.
groundwater)
• Role of exploration (discovery) and development may increase the quantity available of resource
• Modelling is complex because new deposits may come in different forms (new discovery;
improved technology capable of extracting previous unreachable resources)
• Therefore, the distinction between renewable and non-renewable is partly physical and partly
economic  human actions are capable of converting seemingly non-renewable resources into
renewable
 Modelling resource use
• Recyclable resources:
• Non-accumulative renewable resources
• Issue of reversibility: Most renewable resources are reversible; a few
resources (such as biological resources) may have a threshold they may
not replenish (e.g. if the number of species falls substantially to support
higher reproduction than mortality rate)