CH 4

CHAPTER FOUR
4.NATURAL RESOURCES
4.1.CLASSIFICATION OF NATURAL RESOURCES
Natural resources are categorized in a number of ways.
However, the common classification is based on their
exhaustibility, i.e. their inter-temporary characteristics.
Accordingly, natural resources have two main classes;
renewable resources, and non- renewable
1.Renewable Resources
Renewable resources are resources which have a
continuing process of regeneration and supply in nature.
They are commonly named as “flow resources,” since it
is possible to maintain definite use as far as production
continues.
04/21/2024 Lati M., Dadu, Department of Economics 1
• Flow means the change in stock over an interval
of time, where the change results either from
biological factors such as the entry of new fish
in to the population through birth or the exit
from the population due to natural death or from
economic factors such as harvesting of the
species. Stock measures the quantity of the
resources exist at a point in time measured as the
aggregate mass of the biological material in
question such as the total weight of fish of a
particular age or the cubic meter of standing
timber, or in terms population number.
04/21/2024 Lati M., Dadu, Department of economics 2
a)Renewable resources without storage possibility
• This class of resources incorporates solar
radiation, wind, tide and scenery which are
typically the most flow resources. The follow
from these resources may increase, decrease or
constant. However, substitution of the resources
from one period to another period is impossible.
In other words, the output from this type of
resources cannot be physically stored.

b)Renewable resources capable of being stored
The outputs form this category of resources
have the possibility of being stored but the
output is independent of the quantity stored.
The best example is rain fall which is used
for the production of hydroelectric powers.
The precipitation can be stored in dams and
the stored flow can be considered as a stock
which can be used in the future period.
However, the amount of rain fall cannot be
affected by the water stored in dams.
c)Renewable resources with augmentable stock
Resources under this category include living
organisms. The main feature of these resources is the
existence of reproducible stock. For some resources
such as fish, trees, etc, the output is directly related to
the size of the stock.
2.Non-Renewable Resources
Non-renewable resources are resources fixed in
quantity and as a result the current use of these
resources implies a decrease of its availability in the
future.
04/21/2024 Lati M. Dadu, Department of economics 5
The distinguishing feature of these resources is that they
are available in the form of fixed stocks. This category
includes resources which are formed by geological
process which often takes millions of years. For these
resources, the more we extract and use today the less we
will get in the coming period. There are two sub-classes
of non-renewable resources.
a)Depletable stock resources
This class of resources includes those which are formed by
geological nature with the feature that the utilization of one
unit of a resource leads to minimization of its availability in
the future. Best examples are coal, oil, and natural gas for
energy purpose .For such type of resources, it is impossible to
reuse them.
 b)Recyclable stock resources
 These groups of resources are distinguished by the
permanency of their quantitative properties such as
size, shapes, location and exposure. The important
resource among them is land. The services that they
offer can be sustained forever even if the physical
stock of these resources is limited. For instance, the
services offered by a given area of land either it is for farming
or housing, can be available in the future period irrespective of
its current use given the quantity of the resource is maintained.
Resource Scarcity
One of the most common questions or
debate over the use of natural resource is
that “are we running out of resources?”
For non-renewable resources, a positive
rate of extraction implies that the physical
stock of such resources is diminished.
Resource scarcity indicates that all
resources are scarce because they are
found in limited amount while wants are
unlimited.
Scarcity shows that natural resource is becoming
difficult to obtain and needs more of other
resources to get it.
There are several indicators or measures of
natural resource scarcity. These are:
Physical indicators (reserve-to-consumption
ratio)
Marginal resource extraction cost (real unit
cost)
Marginal discovery and exploration cost
Real prices
Resource (economic) rent
1.Physical indicators: There are a
number of physical indicators which are
used as a measure of scarcity including
reserve quantities and reserve-to-
consumption ratio. Additional amount
of resource can be obtained as
additional exploration, discovery if
extraction effort is applied. However,
the absence of this physical data
restricts the usefulness of this measure.
2.Marginal extraction cost (real unit cost):
One of the appropriate indicators of scarcity
off resources is the additional extraction
costs of getting the resources from the
prevailing reserve. Ricardo considered the
use of agricultural land in his analysis, and
said that as the demand for food increases,
production moves on to the less and less
productive land (marginal land). The key
assumption of Ricardo is that the best
quality farm would be cultivated first.
As food production went to the marginal land, this
expansion at the extensive margin would require food
prices to increase in order to cover the higher cost of
production. It results in scarcity rent on fertile land
because all farmers now get the higher prices. This
rise in rent on the fertile land initiates farmers to use
more capital and labor inputs. As a result; capital
and labor input per unit of out increases over time at
both the intensive and extensive margin; given the
state of technology. This means cumulative
production increases average costs. Therefore, costs
are an indicator of scarcity (‘Ricardian indicator’).
3.Marginal exploration and discovery costs: These
are alternative measures of resource scarcity.
According to this indicator, greater discovery costs
are considered as an indicator of resource scarcity.
But, usually they are not used as measure of
scarcity because of difficulty to get long run
reliable data.
4.Real price: Prices are conventionally well-
established microeconomic indicator of scarcity. As
far as natural resources are concerned, many have
argued that increased in real price is potentially a
However, it is criticized due to different reasons:
 The price of the product may be affected by
agreement among producers not only because of
scarcity;
 There may be government intervention in the
factor market which affects price of a product
 The price of natural resources does not include
social opportunity cost because producers are
not obliged to pay the environmental damage
they create during extraction and processing.
It is argued that oil price should be low because
producers are not obliged to pay all the external costs of
oil04/21/2024
devilling and refining.
Lati M., Dadu, Department of economics 14
5.Economic rent: In this case, economic
rents are the difference between price and
marginal extraction cost. According to this
indicator, increasing rents are an indicator
of scarcity. However, this measure faces
problems such as;
There is a shortage of empirical data.
Governments as well as firms do not
have the habit of recording these data.
4.2.NON RENEWABLE RESOURCES
The consumption and production of non-renewable
fossil energy fuels are the main causes of man of
the world’s serious environmental problems. But,
mostly we do not consider the adverse external
effects generated from the extraction and
consumption of these resources.
4.2.1.Theory of optimal Depletion of Non-Renewable Resources

Now let us use one simple mode through which we
can observe basic concept about optimal depletion
of non- renewable resources.
For simplicity, let we start with a model which has
two time periods, and we can make generalization for
long time period. The demand curve we use has a
maximum price, a price at which demand would be
decreased to zero. This increase in price would
indicate the scarcity of resources as;
1)It acts as an indicator of scarcity-if price decreases,
we may not worry, but if it is increasing, we should
start to worry.
2)It indicates that there exists substitute for a
resource which becomes economically more
attractive at that price.
Increasing prices will also make recycling ‘old’
materials more valuable than before. In addition,
rising price will encourage people to be more
efficient in their use of resources.
4.2.2.Energy and Mineral Resources
A.Energy Resource
Energy has been briefly defined as “the ability to do
work”. It exists in a variety of forms; mechanical or
Kinetic, electrical, thermal, radiant, chemical or
nuclear, and changes in a physical state for example
production, need an input of one or more these forms
of energy
Therefore, an economist who is concerned with
the allocation of scare resources between
competing uses will inevitably have to consider
either explicitly or implicitly, as part of this
allocation problem, the energy transformation
involved in the process of production or
consumption. Non-renewable energy resources
such as oil, coal, natural gas, nuclear energy,
etc, are found in a fixed stock and are basic
elements of economic development. Hence,
efficient utilization of these the available energy
sources and improving the supply in quality and
quantity is a key in the development process.
Energy consumption
One of the principal ways in which developed
countries are distinguished from the less developed
nations in their use of energy. Poor farmers in a less
developed nation rely on human power. Oxen or
some equivalent are still used in many parts of the
world to draw plows and provide motive power
beyond the strength of men. But, developed countries
consume large quantities of energy for transportation,
for industrial uses, and for heating or cooling of
building places. In Ethiopia, like in most developing
countries, the energy sector is dominated by
traditional energy.
Modern energy, petroleum, natural gas, and their
infrastructure for energy supply are limited to
urban areas. As a result majority of the population
living in the rural areas have little access to
modern energy.
Initially, all human energy consumption depended
on renewable resources, in particular biomass
resources used for food, heat or light. Only during
the second half of the 19th century did a
depletable resource surpass renewable resource
use. Crude oil and natural gas started supplying
large quantities of energy only in the 1920’s.
So, an economy in competitive general equilibrium is
efficient (i.e. Pareto optimal) if it simultaneously
produce efficiency in consumption, production and
choice of product mix. To summarize, the three
conditions for efficiency in the resource allocation;
i) Exchange (Consumption) Efficiency
 “Maximum” utility for individual consumers.
ii) Input (Production) Efficiency
 “Maximum” output from combinations of inputs
used.
iii)Product-Mix (Substitution) Efficiency
 Optimum mix of commodities and consumption

The three primary fossil fuels-coal,
petroleum, and natural gas, each includes
carbon. During combustion, carbon
combines with oxygen to produce carbon-
dioxide. The typical greenhouse gas carbon
dioxide accumulates in the atmosphere and is
expected to result in significant impacts on
the world’s climate, including global
warming, rises in the ocean level, melting of
ice in the polar areas, increased intensity of
tropical storms and losses in biodiversity.
B. Mineral Resources
Products made from mineral resources of the
Earth are so familiar in modern world that
we tend to take them for granted. In fact,
most of the industrialized nations own their
present position to an abundance of a broad
range of these resources. Many of these
resources, but by no means all, are metals.
They never come from the ground as pure metals,
but rather are found as chemical compounds.
These compounds, along with the relatively few
elements that occur in pure form are referred to
as Minerals, in that they have defined it
chemical compositions. Some of the examples
are;
• Aluminum
• Iron
• Manganese
• Magnesium etc.
4.3. RENEWABLE RESOURCES
Renewable resources can be regenerate.
However, they can also be fully exhausted or
extinguished. For example, if too many fish
are harvested over some time period and
their ability to reproduce is reduced, the
stock may decline over time. If harvesting is
so great as to prevent any new births over
time, the fish will become extinct. Thus a
sustainable natural resource can be turned
in to unsustainable one by excessive
harvesting.
4.3.1.Fisheries
1.Biological Dimension of Fisheries
Fisheries are renewable resources because fish are
living creatures that reproduce, grow and die. The
following illustration shows this:
Birth Death
In this dimension, we measure the fish
population in biomass (weight) units. Suppose
G denotes the growth.
G= Birth - Death;

 If G> 0 implies Population goes up;
 If G=0 implies population remains fixed
(constant).
 If G<0 implies population declines.
The growth rate of fish stock depends on its
size. With small stock size births will tend to
outnumber deaths due to large food supply.
But as the stock size increases, deaths begin
to rise as food per fish diminishes and hence
growth rate will decline. The stock may
ultimately get so large that deaths will equal
births, and the growth rate will fall to zero.
What is the difference between stocks and flows
in a fishery?
 The stock or population of fish is the aggregate
weight of the fish population measured at any
point in time whereas the flow is the change in
the stock over an interval of time. This change
results from biological factors such as the entry
of the new fish in to the population through birth
(called recruitment), growth of existing members
of the population, and natural death; an
economic factor such as harvesting the fish.

4.3.2.Forests-Renewable Resource
A forest is a form of capital resource like a stock of fish.
It is a renewable resource that lies on both natural
regeneration and replanting by forest managers to
produce new generation of trees. Land covered by
forests can be provided a sustainable flow of a variety
of products and services. These include:
 Timber production.
 Water protection: Watershed protection functions of
forests include- soil conservation, water flow
regulation (including flood control), water supply etc.
 Carbon storage and sequestration (regulating
climatic impacts): Trees cleans the air by absorbing
carbon
04/21/2024 dioxide and adding
Lati M., oxygen
Dadu, Department of economics 30
 Wild life habitats: Forest provides habitats for a
variety of plant and animal species
 Tourism and recreation: Forests provide nice
scenery and hence recreational services.
 Eco-tourism is a growing activity and constitutes
a potentially available use of forests.
While the different uses of forests stated above are
important, in this unit we are interested only with
timber production.We exclude the non-timber
values of forests to focus on understanding of the
economics of growing trees for timber production.

Key differences between Fisheries and Forestry
 Forestry is land based and fishery is sea based;
makes defining property right for forests easier
 Competition exists for land resources and land
use. Land can be used to produce timber,
agricultural products, construct houses, or other
investments. This competition among different
land uses affects the harvest of forests. Because
there is competition for different land uses, our
optimal harvesting age of trees is defined as the
point where land rents (or profits) are
maximized. There are fewer competitive uses for
the ocean in the case of fishery.
 Trees are long-lived. Tree growth occurs over long
time period and can be measured. Therefore, there
is a fairly long lag between regeneration and
harvest. While fish species can live from many
years, forests take longer to regenerate and grow to
maturity.
1.The biological Dimensions of Trees and Forests
When a tree grows; the amount of timber (wood)
useable for commercial harvest changes over time.
Tree growth on a particular site is measured on a
volume basis like cubic meters. Only, standing trees
are measured, exclusive of these toppled by wind, fire
or old age.

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CHAPTER FOUR

04/21/2024 Lati M., Dadu, Department of economics 3

4.2.1.Theory of optimal Depletion of Non-Renewable Resources

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