Natural Resource Economics

Natural Resource Economics

Introduction

This essay discusses some of the most critical concepts in the field of natural resource economics. It critically analyses the concepts of current reserves, potential reserves and resource endowment, clearly drawing out their differences. The paper further analyses the effect that considerations such as the presence of renewable resources, technological development and the marginal cost of exploration have on the consumption rate of depletable resources. The essay also discusses the effect that consideration for environmental conservation has on the consumption rate of depletable resources. Finally, the paper concludes by showing how businesses can employ a sustainability-focused business strategy and in the process increase their profitability due to the benefits associated with this strategy.

Define and Differentiate Current Reserves, Potential Reserves, and Resource Endowment

The concept of categorization of non-renewable resources as current reserves, potential reserves, or Resource endowment was made based on the economic and, or geological dimension of these resources. Current reserves have beendefined as the documented non-renewable resources which can be extracted from the earth’s crust at current prices and at a profit (Tietenberg & Lewis, 2016). The scale of current resources takes a numeral value. Potential reserves are the amount of a resource that is available with current technology if people are willing to pay the cost of extraction. Like current reserves, the size of Potential reserves is also dependent on the value that people have attached to the resource and the amount they are willing to forfeit for the resources. According to Dinar (2011)the higher the attached value or worth of a depletable resource, the larger the potential reserves of the resource. That is, as resources prices increase higher, potential reserves become larger. Higher prices unleash not only more expensive measures to recover more of the resource from conventional sources, but also measures to extract resources from previously untapped resources. However, unlike current reserves which take a numeral value, potential reserves assume a function. The size of potential reserves and current reserves are subjective to developments in price and technological progress, as such, they cannot be deemed as fixed. These unique characterizations make potential reserves and current reserves economic concepts. On the other hand, resource endowment is a geological concept. It has been defined as the total amount of a natural occurring resource available in the earth’s crust. According to Nair (2010), the size of a resource endowment is independent of its price, and therefore it is a geological concept, as opposed to an economic concept.

How the following factors affect the rate at which non-renewable resources are consumed

  1. Availability of Renewable Resources

The obtainability of a non-depletable resource as a substitute for depletable resource affects the consumption rate of consumption of a depletable resource through two considerations: the Total Marginal Costof the non-renewable resource and the marginal cost of the non-depletable resource (Dinar, 2011).The availability of a non-depletable resource will only affect the consumption rate of the depletable resource at the point where the total marginal cost of the non-renewable resource is equivalent to the marginal cost of the renewable resource. That is, the point at which a switch is made from non-renewable resources to renewable resources will depend on the marginal cost of a depletable resource and the marginal cost of extracting the non-depletable resource. As long as the MC of a depletable resource is less than the MC of finding and extracting the renewable resource, only the non-renewable resources will be used, and the availability of a renewable resource will have no effect on the consumption rate of the depletable resource. The switch point occurs when the marginal costs of extraction of the renewable and non-renewable resource are the same. However due to technological progress and exploration activities that continuously lower the costs of extracting the non-renewable resource, the switch point between renewable and non-renewable resource is prolonged and delayed. That is, technological progress and exploration activities lower the Total Marginal Cost and hence it does not equal the Marginal Cost of the renewable resource. It is, however, worth noting that from a social perspective, the availability of renewable resources as a substitute for non-renewable resources may reduce the consumption rate of non-renewable resources depending on the goodwill and willingness of the society to employ the use of the renewable resource bearing its relative sustainability benefits relative to non-renewable resources. The shift from depletable to non-depletable resources will also depend on the price, productivity, and efficiency of the non-depletable resource relative to the non-renewable resource.

  1. Marginal Cost of Exploration

The total marginal cost of investing in exploration directly influences the price of a product and affects the future prospect of an exploration. According to Tietenberg & Lewis (2016), for an exploration to be profitable, the Marginal Cost of extraction must be equal to the net present value of the marginal benefits to the resource owner. As such, as the MC of extraction becomes higher, there is a point at which the benefits, the opportunity cost of current extraction, drops to zero. At this point abstinence has been reached, and consumption drops to zero. The non-renewable resource is not completely exhausted; some of it is left on the ground because it is too expensive to take out. Exploration can continue beyond the point of where the opportunity cost of current extraction is below zero only if the market price considerably increases, at which point the consumption rate will be low. In other words, the price of the resource must compensate the resource owner for the MC of extraction, the MC of expanding the reserve base, and the opportunity cost arising from reduced future exploration success and subsequent extraction (Dinar, 2011). In brief, if the marginal cost of extraction is high, the price of the non-renewable resource will be higher, and its consumption rate will reduce, if the MC of extraction is low it will result in a lower price of the non-renewable resource thereby increasing consumption rate of the resources. However, the eventual price and consumption will also be dependent on the rate at which discoveries of new resources outpace depletion.

  1. Technological Progress

Developments in technological would affect the rate of consumption of depletable resources through its effect on the marginal cost of exploration and extraction. According to Dinar (2011), Breakthrough in technology reduces the marginal cost of exploration by creating more cost-effective exploration, extraction, and processing methods. As such, technological progress reduces the rate of consumption of a depletable resource since it lowers the marginal costs of extraction, substitution, and exploration, while at the same time offset the depletion of natural resources, pollution, and population growth. Technological progress pushes downwards extraction costs over the time when the technology is efficient, and resource extraction has been abridged. If the cost-reducing effect of technological progress is strong such that notwithstanding the increased reliance on poor resources, the marginal cost of extraction decreased, the total MC of a resource could also go down over time. With a depletable aggregate of the non-renewable resource, a decrease in total marginal costs would be transitionary since eventually it will rise. If technological progress results in new finds, it will result in more consumption of a non-renewable resource. However, successful exploration as a result of technology progress will result in a slower fall in resource consumption by dulling the increase in total marginal cost.

However, it is worth noting that the optimal rate of consumption of a non-renewable resource is given by Hotelling’s rule. The rule posits that the price of a resource at any time is equivalent to its price in an initial period compounded at a given discount rate. Thus, a resource owner would be indifferent between extracting a non-renewable resource at the present and extracting it in future, when the discounted value of the depletable resource is constant.

How Consideration for Environmental Conservation May Affect the Rate at Which Non-Renewable Resources are Consumed

Considerateness for the conservation of the environment affects the consumption rate of nonrenewable resources. This is especially with non-renewable resources that have adverse externalities. The existence of externalities by non-renewable resources requires a lower rate of consumption of the resource. This is meant to ensure a social optimum. A market that does not take into consideration the effect of externalities will lead to a consumption rate that is too high from a social welfare perspective. If the hoteling’s rule holds when there are considerations for environmental conservation, the consumption rate of depletable resources is expected to continuously fall over time. However, the Hotelling Rule does not hold in reality, and therefore, the rate of consumption does not fall over time because resource prices do not increase significantly. Therefore, for as long as the Hotelling rule fails, there cannot be a ‘natural’ solution to the growth-environment tradeoff. As such it will require government intervention. These solutions will be geared towards reducing the rate at which non-renewable resources are consumed and would also provide some economic benefits. Some of the more commonly employed solutions include energy conservation measures, the imposition of price controls, the imposition of carbon pricing through cap-and-trade and taxes. It can also involve a shift from fossils fuels to renewable and clean sources of energy. These steps, taken in considerations of environmental conservation will affect the consumption rate non-renewable resources by reducing their rate of consumption. The implementation of these considerations will increase the marginal cost of depletable resources reflected through the price of these resources resulting in a shift of demand from non-renewable resources to renewable resource. The increased demand for non-renewable resources if not matched with a more than proportionate increase in thesupply of renewable resources will result in an increase in the price of the renewable resources.

Utilizing the Article by Hopkins (2009) to Discuss the Opportunities for Increased Profit Caused by a Focus on Sustainability

According to Hopkins(2009), a strategy of sustainability can be employed to secure and attain a company competitive advantage increasing its profits. The author reports that profitability under a sustainable strategy can be achieved through several stratagems including mapping of one’s flows and costs of materials and energy. This strategy, the author reports will enable a business to find fiscal, ‘leaks’ that can be fixed, with direct bottom-line benefits.Hopkins(2009)also reports that sustainability-related efforts have positive side-effects that create opportunities for increased profits. These positive side effects achieved as a result of sustainability efforts include gains in innovation, labor productivity, and appeal. These opportunities for increased profit by a focus on sustainability have also been supported by Willard (2013). According to Willard (2013), a focus on sustainability increases profits by improving competitive advantage, increasing employee productivity, increased revenue and reduced costs, increased market share, improved energy efficiency, reduced hiring and attrition expenses, reduced risks, and Enhanced Brand image.

Conclusion

In conclusion, the concepts of current reserves, potential reserves, and resource endowment are critical concepts, especially in the 21 century. While, these concepts all relate to resources, current reserves, and potential reserves are economic concepts whose idealization is based on the price that people are willing to pay for them, and therefore, they are not fixed or predetermined. On the other hand, resource endowment is a geological concept that can be deemed as fixed since it is simply a summation of all the resources on the earth’s crust. However, all these concepts have informed major economic, social, political and environmental decisions. The availability of non-depletable resources, marginal cost of exploration, and development in technology have different effects on the consumption rate of non-renewable resources. These effects are dependent on elements such as the total marginal cost of extraction, the marginal cost of exploration, the marginal cost of expanding a reserve base, and the arising associated opportunity costs, desire for conservation and sustainability, as well as the applicability of the hoteling’s rule. The paper has also evidenced that, contrary to public misconception, a sustainability-focused business strategy presents more opportunities for profitability to a firm and results to an increased bottom-line for any business that adopts this strategy. As such, more and more businesses should endeavor to be more sustainable in its business operations.

 

References

Dinar, S. (2011). Beyond Resource Wars: Scarcity, Environmental Degradation, and International Cooperation. Cambridge, Massachusetts: MIT Press.

Hopkins, M. S. (2009). What executives don’t get about sustainability (and further notes on the profit motive). MIT Sloan Management Review, 51(1), 35-40.

Nair, R. D. (2010). Natural Resources Management and Agrarian Development. New Delhi: Concept Publishing Company.

Storksen, I., Roysamb, E., Holmen, T. L., & Tambs, K. (2006). Adolescent Adjustment and Well-Being: Effects of Parental Divorce. Scandinavian Journal of Psychology, 47, 75-84.

Tietenberg, T. H., & Lewis, L. (2016). Environmental and Natural Resource Economics. New York, NY: Routledge.

Willard, B. (2013). The New Sustainability Advantage: Seven Business Case Benefits of a Triple Bottom Line. New York, NY: New Society Publishers.

 
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