Resources Economics

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 Suggested Books

1. Kneese, A.V. (1995). Natural Resource Economics; Edward Elgar Publisher

2. Kneese, A.V. and Sweeny, J.L. (1993). Handbook of Natural Resource and Energy
Economics, North-Holland.

3. Hackett, Steven C. (2006). Environmental and Natural Resources Economics: Theory,

Policy, and the Sustainable Society, 3rd edition (New York: M.E. Sharpe)

4. Tietenberg, T. (2010). Environmental and Natural Resource Economics, Pearson Education

Inc.

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 Origin of Concern_Diverse Natural Resources Problems

 Declining environmental quality standards

 Irreparable damage inflicted on life support system

 Drought & desertification

 Physical exhaustion of mineral stocks

The question of natural resource base distribution over space and time

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 Perspective on Resources Economics

 Humanity faces a full of stresses and strains that life will not be comfortable
for a long time

 The question of whether humanity can converge to a sustainable economy

i.e.

Peaceful life

Safe planet

Governance-driven human activities

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 Centrality of this course-resources define development

To explain the processes operating to produce current resource and welfare
allocations

To evaluate the resulting outcomes

To analyze who has the power to determine the distributive patterns

 To assess the role of efficacy of public policy measures to affect significant

changes in the allocative system

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 Natural Resources: their nature and scarcity
RESOURCSES DEFINED [i.e. Naturally available plants, animals, water, wood, and stone]

 It is defined by man, not nature [example: usefulness of his/her environment]

 Two basic preconditions to be satisfied for a ‘resource’

(i) Knowledge and technical skills must exist to allow its extraction
(ii) There must be a demand for the materials or services produced.

 If either of these conditions is not satisfied, it is a ‘neutral stuff’.

 REMARK:
 Human ability and need which create resource value, not mere physical presence.
 We have no resources scarcity acknowledging the role of human ethical value
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 Dynamism in the resource definition
 Physical endowment of the earth is essentially fixed

 Resources are dynamic with no fixed limits

 Resource needs have been changed in response to

Increased knowledge
Technological improvements
Economic development
Cultural development
Human values and lifestyles
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 RESOURCE TYPES

Stock resources: non-renewable

If the rate of use exceeds the rate of natural replenishment
Current rates of consumption must affect future availability

Flow resources: renewable

If the rate of natural replenishment exceeds the rate of use
Resources which depend on biological reproduction for their renewal

Differences
It lies in the timescales over which they develop

Being products of natural cycles, all are renewable but at very different rates.
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 A classification of resource types
STOCK FLOW
Consumed by use Critical Non-critical
zone zone

OIL FISH SOALR

ENERGY
GAS FORESTS
TIDES
COAL ANIMALS
WIND
SOIL
WAVES
WATER IN
AQUIFERS WATER

AIR
Critical zone resources become stock once regenerative capacity is exceeded

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 Fundamental Differences
 Biotic: living things/organisms within an ecosystem
[i.e. plants/trees, fish/animals, and bacteria/insects]

 Abiotic: non-living things/organisms within an ecosystem

[i.e. water, earth/soil, and air/atmosphere, metal rocks, sunlight, temperature, humidity
(climate)]

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 Renewable & exhaustible resources
 How they are managed?
 How they should be managed?

 Renewable resource:
 It regenerates itself
 Examples-fish and trees
 Fishery-catch a number of fish and leave the rest to grow naturally
 Fish stock does not die with reproduction

 Exhaustible resource [Gray, 1914; Hotelling, 1931]:

 It is fixed in overall quantity
 Usage in a given time is less available for other time
 Does not have regenerating capability
 Examples-coal and oil [fossil fuels] & minerals

 Management Issue:
 Fish & trees are exhaustible if not managed in a sustainable way.
 Advantages of Renewable and Non-renewable Energies
Renewable Energy Non-Renewable Energy

 Operating cost is low.  It is affordable and easily available.

 Environmental Friendly.  Easy to use and more reliable in the short-

run.
 Clean energy and more can be  More can be produced in the short-run.
produced in the long-run.
 Produces Low carbon emissions and  known for its quick exploration.
stimulates green economy.
 Infinite (stock)  Expandable in response to human effort
(flow)
 Dis-advantages of Renewable and Non-renewable Energies

Renewable Energy Non-Renewable Energy

 Expensive in the short-run, and less  Eventually run out, becomes scarce and
reliable and becomes affordable in the also becomes expensive.
long-run.

 Not effective of producing energy in  Threatening to the natural environment.

massive scale, particularly in the short-
run.

 It can be noisy and requires more space.  Dirty Energy.

 Finite at a given time (flow)  Finite (stock)

 Infinite over a period of time
 Elemental Resource Base and Life Expectancy for Selected Minerals
Life Expectancy in years with different consumption growth rates
Minerals 2% 5% 10%

Aluminium 1107 468 247

Cadmium 771 332 177
Chromium 861 368 196
Cobalt 1009 428 227
Copper 772 332 177
Gold 709 307 164
Iron 898 383 203
Lead 724 313 167
Magnesium 1095 463 244
Manganese 906 386 205
Mercury 773 333 178
Nickel 559 246 133
Phosphorus 881 376 200
Potassium 1005 427 226
Platinum 944 402 213
Silver 766 330 176
Sulphur 769 331 177
Tin 760 327 175
Tungsten 829 355 189
Zinc 1151 486 256
Source: Tilton, J.E. (1977), page: 12-13 [The Future of Nonfuel Minerals]
Note: All minerals would exhausted in under 260 years, sign of resource scarcity
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 WHEN WILL FOSSIL FUELS RUN OUT?

• Fossil fuels are non-renewable resources.

• They formed millions of years ago.

• Waiting for new fossil fuels to form is not an option with our rising demand.

• The deeper we dig, the more likely it is to find natural gas and oil resources.

• Our reserves will be empty soon.

https://group.met.com/en/mind-the-fyouture/mindthefyouture/when-will-fossil-fuels-run-
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out#:~:text=Conclusion%3A%20how%20long%20will%20fossil,our%20reserves%20can%20speed%20up
 Reserves vs. resources: when does a resource become a reserve?
 Every reserve is indeed a resource, but not every resource is a reserve.

 Two requirements determine whether a mineral resource becomes a

reserve.

13-11-2024 https://ourworldindata.org/fossil-fuels 16
13-11-2024 Source: Forbes.com 17
 Global demand for fossil fuels

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https://ourworldindata.org/fossil-fuels
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 Fossil fuel consumption: which countries use the most energy from fossil fuels?

https://ourworldindata.org/fossil-fuels
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 https://ourworldindata.org/fossil-fuels
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Alternative strategy in the context of rising resources demand or resources scarcity

Resource scarcity is not an issue if role of substitution comes

Resource scarcity does not stop production and no loss of economic welfare [Kahn et al.,
1976].

Alternative technology or clean energy helps the production

Increasing the share of clean energy if fossil fuels price increases

Role of clean energy becomes essential if ecology threatens

 Sustain the planetary health

Growing fossil fuels demand and clean energy policy

Both resources are complementary

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 Proposed questions
• USA uses more oil and China depends on coal

• Why does USA use more energy from fossils?

• Why does China use more energy from fossil fuels?

USA demands more fossil energy for living standards and life style
China’s consumption and production activities depend on fossil energy.

Blaming debate must end in the context of environmental crisis.

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 Causes of resource scarcity
• Population growth: growing needs of the people

• Market imperfections: keeping minerals in the ground, output restrictions

and barriers to entry of new firms, underexploited resources

• Resource insecurity [minerals self sufficiency policy ineffectiveness]:

international resources do not ensure sufficient supply to demand
response

• Economic exhaustion: market forces exhaust the resources long before

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 Solution suggested for resource scarcity issue

• Adopting advanced technological change in extraction when less deposits exist

• Increase the share of clean energy when growing demand-driven stock

resources scarcity exists

• Remark: replacing traditional technology and fossil fuels could solve the
resources scarcity problem.

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 Per capita: where do people consume the most energy from fossil fuels?

13-11-2024 https://ourworldindata.org/fossil-fuels 27
13-11-2024 https://ourworldindata.org/fossil-fuels#article-citation 28
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13-11-2024 https://ourworldindata.org/grapher/years-of-fossil-fuel-reserves-left 30
 Conclusion: how long will fossil fuels last?

•It is predicted that we will run out of fossil fuels in this century.

•Oil can last up to 50 years, natural gas up to 53 years, and coal up to 114 years.

•Yet, renewable energy is not popular enough, so emptying our reserves can create
challenges and problems.

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 The Market Optimists
The Market Response Model

Perfectly working market economy

Inevitable price rise due to resource scarcity and rising production costs

Demand decreases

Users turn to cheaper substitute or introduce recycling measure

Incentive for innovation

Promote development of new extraction

Supply increases

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 The Idealized Market Response to Resource Scarcity
Scarcity

Extraction Costs Rise

Prices Rise

Demand Decrease Supply Increase

Increase use of substitutes, Increase viability of known

greater economy in use, More deposits
Recycling

INNOVATIONS

Development of new
Search for new deposits,
substitutes,
Development of methods
Development of
to increase the output
improved conservation
from known sources
methods, Improved
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 Types of Capacity
• Sustainable Capacity
Equality of Opportunity to Future Generations

• Absorptive/Assimilative Capacity
Absorbing disposal of waste products from human activity
As long as the wastes come under biological process of decomposition,
the nature has capacity to absorb

• Carrying Capacity
Resource use should be limited
Resource productivity is sustained
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 Pollution Possibilities
 No pollution if wastes or residual flows < assimilative capacity

 Pollution exists if wastes or residual flows > assimilative capacity

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 Emerging Issues before and after pollution threshold levels

 Before pollution threshold level  After pollution threshold level

• Pollution is affordable • Pollution not affordable

• Nature has the absorbing • Does not have the same capacity
capacity

• Output growth drives pollution • Drives pollution but dangerous

but not harmful pollution

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 Pollution beyond threshold level sees problems and suggestions
 Key challenges in an emerging  Key suggestions for an emerging
economy economy
• Growth is necessary but • Structural change needed
• Modify production system
• What growth?
• Inject alternative method
• 7% growth not enough
• Green technology adoption
• More than 7% growth harms environment • Energy efficiency
• Pollution implies market failure
• Question of non-green growth
• Question of poor institutions • Minimal government intervention for foreign
investors and maximal for domestic

• Growth does not account for environmental loss • Maximal governance creates green growth

• Growing economy with poor institutions exploits  Higher growth with ecological balancing
environment does not create green growth
 Incentivizing if concerned and taxing if not concerned
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 Economic growth and income inequality Linkage

Kuznets, S. (1955), “Economic growth and income inequality”, The American

Economic Review, Vol. 45 No. 1, pp. 1-28.

 The Kuznets curve indicates that inequality would first increase and then
decrease with income.

 Some countries reduce inequality as they grow.

 Environmental Kuznets curve for CO2 emissions
 Motivated by the Kuznets (1955) curve hypothesis on the linkage between economic growth and income inequality.

 Grossman (1995) discussed the premise of EKC hypothesis indicating the interaction between economic growth and
environmental degradation.

Industrial Sector

Agriculture
CO2 Sector
Emissions Service
Sector

Scale
effect Composition Effect Technique Effect

Economic Growth

Figure 1: Environmental Kuznets Curve and Channels of Economic Growth

Grossman,
11/13/2024 G.M. (1995), “Pollution and growth: what do we know?”, in Goldin, I. and Winters, L.A. (Eds), The Economics of Sustainable
39 Development, Cambridge University Press, Cambridge, MA, pp. 19-45.
 Channels Effects of Economic Growth on Environmental Degradation

 Scale Effect:

 Labour intensive in agriculture

 With increasing growth, the demand of natural resources rises.

 Natural resources are translated into the production process.

 Economic growth poses a serious threat to environmental quality.

 Composite Effect:

 Shifting to manufacturing and industrial sectors.

 Capital Intensive

 Environmental degradation starts rising with a rise in industrial growth.

 Sectoral Composition of an economy starts changing.

 Technique Effect:

 Tertiary sector (service sector) starts growing.

 Knowledge-intensive, rather than capital-intensive.

 Polluting technologies getting substituted with R&D investments.

 Environmental quality gradually improves with a rise in economic growth.

 Different Specifications of the EKC Hypothesis
Model specification:

Y=a+b1X+b2X2+et--------------------------(1)

Where Y is carbon emissions per capita,

X is economic growth;
a is intercept term and e is error term.

1) When b1=b2=0; no economic growth-carbon emissions association

2) When b1>0, b2=0; linearly increasing economic growth-carbon emissions association

3) When b1<0, b2=0; linearly decreasing economic growth-carbon emissions association

4) When b1>0, b2<0; inverted U-shaped economic growth-carbon emissions association

5) When b1<0, b2>0; U-shaped economic growth-carbon emissions association

 KUZNETS WAVES
• What forces will shape global pollution in this century?

• What will happen to rich countries’ middle classes if pollution measures are in
place?

• How can pollution in rich welfare states be reduced?

• Why is it wrong to focus exclusively on market income?

• Will economic growth still matter?

• Will pollution disappear as income grows?

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 PERSPECTIVES ON THE KUZNETS HYPOTHESIS

Limitations of Kuznets Hypothesis Key Insights

• Economics of enough is questions as
pollution rises. • Pollution increasing before threshold level
should be disproportionate
• Only income level as the main
determinant of pollution
• Pollution should increase at a decreasing
• Beyond threshold level, it is not applicable rate
to developed country
• Economies of scale should involve energy
• Example: rising income level in Unites efficiency, green innovation, green growth
States does not reduce pollution due to
life style and behavior of people & reducing, reusing and recycling
mechanism
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New Understanding based on Meadow et al. (1972) argument_’’The Limits to
Growth’’

 EMERGING COUNTRIES LIKE INDIA  DEVELOPED COUNTRIES LIKE UK

Limit growth due to resource scarcity Limit growth due to pollution

Problems arise
Problems
 Poverty
 Inequality
 Unemployment
?
 Size of firms ?
?
Hybridizing growth-AI and digital  Energy Aid; Foreign Aid
infrastructure inclusion
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 Meadows et al. (1992)_Beyond the Limits
• Resources scarcity due to exponential population growth

• Exponential resources mining

• Exponential resources consumption growth

Example:

y = years left;
r = the continuous compounding growth rate;
s = R/C or static reserve;
R = reserve (775 million metric tons per capita);
C = (annual) consumption (1.85 million metric tons)
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How long resources will last?

Way Out:

Respect ultimate resources

Pollution is a global problem to be fixed

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 Basic model
• Production Function: Y=f(L, N, K, O)------------------(1)
Where Y: Output,
L: Land(R=Rent),
N: Labour (W=Wage),
K: Capital (r=Interest),
O: Organization (P=Profit)

Extended model
• Y=g(L,…., R)------------------(2)
Where R: Resources use

i. DY/DR>0, Implies resources-led growth but no loss of environmental quality if resource

efficiency (RE) is maintained.
ii. DY/DR>0, Implies resources-led growth occurs with loss of environmental quality if
resource efficiency (RE) is not maintained.
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 Human Impact on Environment Through IPAT Model Proposed by
(Ehrlich & Holdren, 1971)
Debate
Environmental Crisis due to Human Activities
Ecologically inefficient choices of technology
Blame for environmental problems attributable to faulty technology

• IPAT: I =f(PAT) (1)

• I(Impact)=P(population) x A(affluence) x T(technology) (2)

• Pollution (I): P (pop.) x A(production/natural capital) x T(pollution/production) (3)

• Environmental Impact: P x Production per capita x Pollution per capita (4)

Remarks:
 Environmental loss possibility if resource inefficiency, harmful population growth and technology
integrated into the production and consumption activities.
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