Lecture Economics (18th edition): Chapter 15 - McConnell, Brue, Flynn''s

Chapter 15 - Natural resource and energy economics. After studying this chapter you will be able to understand: Explain why falling birthrates mean that we are not likely to run out of natural resources, describe why using a mix of energy sources is efficient, even if some of them are quite costly, discuss why running out of oil would not mean running out of energy, show how the profit motive can encourage resource conservation, relate how to use property rights to prevent deforestation and species extinction.

Chapter 15

Natural Resource and Energy

Economics

Chapter Objectives

• Falling birth rates

• Sources of energy

• Running out of oil vs running out of energy

• Resource conservation

• Property rights

Resource Supplies

• Will the world run out of natural

resources?

–World population 6.6 billion

–Standard of living 12 times higher than 1800

–Growing demand for natural

resources

Population Growth

• Thomas Malthus 1798

–Living standards remain at

subsistence level

–Population continues to grow

• Higher living standards have

produced lower birth rates

–Replacement rate

–Total fertility rate

Total Fertility Rates 2007

Country Total Fertility Rate

Australia 1.76

Canada 1.61

China 1.75

France 1.98

Germany 1.40

Hong Kong 0.98

Italy 1.29

Japan 1.23

Russia 1.39

South Korea 1.28

Sweden 1.66

United States 2.09

Population Growth

• Demographers

–Population to peak at 9 billion

• Historically:

–Death rates fall with modernization –Population explodes

–Fertility rate eventually falls below replacement rate

–Children as economic assets vs

liabilities

Resource Consumption

• Commodity demand rising the

last 150 years

–Population growth

–Rising consumption per person

• Commodity supply rising faster

• Declining real commodity prices

• Will this trend continue?

Resource Consumption

• Resource consumption per

person leveled off in richest

countries

–Water use

–Energy use

–Trash generated

• Resource demand will increase

as more countries modernize

Energy Economics

• Dealing with energy scarcity

per 1 million BTU’s

–Energy efficiency

• Will the world run out of energy?

–Run out of oil, or cheap energy

–Alternative sources

–Externalities

Sources of Energy

U.S electricity sources 2006

–Coal 49%

–Nuclear 19.4%

–Natural gas 20%

–Hydroelectric 7%

–Renewables 2.4%

–Petroleum 1.6%

–Other 0.6%

Alternative Energy Sources

• Economic viability of alternative fuels

• Oil price at which alternative

becomes viable

–Biodiesel $80

–U.S corn based ethanol $60

–Shale oil $50

–Tar sands, Brazilian ethanol $40

–Conventional oil $20

Natural Resource Economics

• Policies for extracting resources

to maximize net benefits

• Present vs future consumption

–Present value

• Renewable resources

• Nonrenewable resources

Nonrenewable Resources

• Oil, coal, and metals

• Extraction strategy to maximize stream of profits

• User cost

–Sell today, cannot sell in the future

• Higher expected demand

encourages less extraction today

–Property rights

Renewable Resources

• Forests and wildlife

• Well structured property rights

encourage sustainable use

• Optimal forest harvesting

–30% of world land area

–Variation in growth rates

–Differences in property rights

Renewable Resources

• Optimal fisheries management

–Fishery identified by location and species

–Difficult to establish property rights –Overfishing encouraged

–Policies to limit catch size

–Total allowable catch

–Individual transferable quota

Economic Growth and the

Environment

• Is growth bad for the environment?

• Richer countries produce and

consume more

• Richer countries spend more to

maintain the environment

• Environmental Performance Index

(EPI)

– Richer countries have higher scores

Key Terms

• replacement rate

• total fertility rate

• demographers

• British thermal unit

(BTU)

• net benefits

• renewable natural

resource

• nonrenewable

natural resource

• present value

• user cost

• extraction cost

• conflict diamonds

• fishery

• fishery collapse

• total allowable catch (TAC)

• individual transferable quota (ITQ)

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Public Goods, Externalities, and Information

Asymmetries