Upcoming in Class Homework #6 Due Oct. 25 Quiz #3 Oct. 27th Writing Assignment Due Oct. 27 th Exam #3 Thursday Nov. 3rd
Transcript
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Homework #6 Due Oct. 25 Quiz #3 Oct. 27th Writing Assignment
Due Oct. 27 th Exam #3 Thursday Nov. 3rd
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Explain why we will likely never run out of a non-renewable
resource such as oil. Does this also imply that we will always be
able to extract all the oil we need? Explain.
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What has been the general trend in non- renewable resource
prices in the past several decades? What has generally been
responsible for this trend? Is this trend consistent with
Hotellings rule? Discuss.
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Physical supply - available reserves measured in physical terms
without regard for cost and value Economics supply the amount of a
resource that is available based on current prices and
technology
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Identified reserves the identified quantity of a resources;
includes both economic and subeconomic reserves Indicated or
inferred resources that have been identified but whose exact
quantity is not known with certainty
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Hypothetical the quantity of a resource not identified with
certainty but hypothesized to exist Speculative the location and
quantity of a resource has not been identified but is hypothesized
to exist
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Subeconomic resources resources whose costs of extraction are
too high to make production worthwhile Economic reserves resources
of high enough quality to be profitably produced and are
identified
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Changes to reserves The resources is extracted and used =>
diminished reserves New resource deposits are discovered =>
increasing reserves Changing price and technology can make more or
less of the known reserves economically viable
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http://en.wikipedia.org/wiki/The_Limits_to _Growth
http://en.wikipedia.org/wiki/The_Limits_to _Growth Written in 1972,
predicting over use of resources
http://en.wikipedia.org/wiki/The_Populatio n_Bomb
http://en.wikipedia.org/wiki/The_Populatio n_Bomb Written in 1968,
predicting a population crash due to resource scarcity The wager :
http://en.wikipedia.org/wiki/Simon%E2%80%93Eh rlich_wager
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R=P-MC PV [R] = R 0 + R 1 /(1+r) + R 2 /(1+r) 2 + Optimal
extraction quantity R 0 = R 1 /(1+r) = R 2 /(1+r) 2 = Hotellings
Rule - net price rises over time with the rate of interest.
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Choke price the minimum price of a good or service that would
result in a zero quantity demanded Price path the price of a
resource over time Extraction path the extraction rate of a
resource over time
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For this case, the marginal user cost declines over time and
reaches zero at the transition point. The resource reserve is not
exhausted. The marginal cost of exploration can be expected to rise
over time as well. Successful exploration would cause a smaller and
slower decline in consumption while dampening the rise in total
marginal cost.
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Technology Decreases marginal cost of extraction Higher quality
resources will be extracted first. => subeconomic resources may
become economic when the price rises or technology improves
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Technological progress would also reduce the cost of
extraction. Lowering the future marginal cost of extraction would
move the transition time further into the future. Total marginal
cost could actually fall with large advances in technology.
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The transition can for two depletables with different marginal
costs will also be a smooth one. The rate of increase of total
marginal cost slows down after the time of transition because the
marginal user cost represents a smaller portion of total marginal
cost for the second, higher cost resource.
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An efficient allocation thus implies a smooth transition to
exhaustion and/or to a renewable substitute. The transition point
to the renewable substitute is called the switch point. At the
switch point the total marginal cost of the depletable resource
equals the marginal cost of the substitute.