9. Natural resources and ecosystem services

Question 1

What are non-renewable resources?

Answer 1

Resources in fixed supply like oil, coal or minerals

Question 2

What are renewable resources?

Answer 2

Biological resources for which there is a natural growth function, eg trees, fruit, fish

Question 3

How do ecosystem services broaden the definition of natural resources to natural capital?

Answer 3

Inclusion of renewable, non-renewable benefits and also benefits generated by ecological processes such as when ecosystems filter out pollutants to provide clean air and water.

Question 4

The Millennium Ecosystem Assessment defined 4 categories of ecosystem services, what are they?

Answer 4

• Provisioning services - from non-renewable and renewable resources
• Regulating services - benefits from ecological processes
• Supporting services - underlying support systems or natural infrastructure that allows things to continue to function
• Cultural services - non-material benefits like eco-tourism, recreation.

Question 5

What is the Hotelling rule?

Answer 5

It illustrates that in competitive markets, a profit-maximising equilibrium will occur in which the resource rents generated from scarce non-renewable resources will rise at the rate of interest. So effectively the percentage increase in the resource price will equal the interest rate.

Question 6

Utilising the Hotelling rule, where does the efficient amount of production lie?

Answer 6

It will occur where MB=MC, which is where the discounted prices are equal: Price 1 = Price 2 (1+ rate of return).

Question 7

What are the three fundamental points of the Hotelling rule?

Answer 7

1) if supply of non-renewable resource is limited and scarce relative to demand, those who own resource stock will earn a positive resource rent.
2) Where interest is positive, the price of the non-renewable resource will increase through time.
3) If demand is consistent across periods, then a rising price means falling consumption through time.

Question 8

Why is the 3rd principle of Hotellings rule true? Ie that if demand is consistent across periods, then a rising price will mean a falling consumption through time?

Answer 8

Because the higher the discount rate, the more attractive the foregone alternative investments, the faster the stock will be depleted and the faster the price will rise. Again steadily rising prices are the trigger for firms to invest in potential substitutes.

Question 9

What is dynamic efficiency?

Answer 9

Dynamic efficiency is achieved when the resource stock is allocated over time in a way that maximises the present value of its use.

Question 10

What is the choke price?

Answer 10

When the price rises to the ‘choke price’ then quantity demanded falls to zero (demand is choked off) this occurs when the resource stock is exhausted. For example, a resource stock price will generally slowly increase and then accelerate as the choke price is reached. Demand moves to other items or substitutes.

Question 11

What does the choke price represent?

Answer 11

The existence of a back-stop technology to which users switch to at a given price. Eg. having good alternative power such as solar, will put an upper limit on oil prices.

Question 12

Hotelling predicted that markets will signal scarcity with steadily rising process, providing incentives and time for firms to invest in substitutes. This was not true up to year 2000, what are the two possible explanations?

Answer 12

1) Scarcity of resources is too-far into the future to factor into current consumer and firm behaviour
2) Mining and processing technology has steadily advanced which has shifted the demand curve down and out, further reducing any imminent scarcity (eg through fracking).

Question 13

What is peak oil?

Answer 13

Hubbert predicted that ‘peak oil’ would occur in the 60s/70s in the USA and American production would then decline. This occurred in 1970. But estimating ‘peak oil’ for the world is harder. ‘Peak oil’ is not when oil runs out but when cheap new oil runs out.

Question 14

What are the 2 challenges of predicting global peak oil?

Answer 14

1) poor information about the size of existing oil stocks; and
2) disagreement about technological change.

Question 15

Renewable resources are characterised by a growth function - what does this mean?

Answer 15

It is the difference in a given period to the size of the stock at the beginning of a period and the size at the end. eg. 100 fish becomes 120, then the growth function is 20.

Question 16

Growth functions sometimes display density-dependent growth - what is meant by this?

Answer 16

That as a population increases, the growth function decreases. Eg as the number of fish increase, there are fewer food resources to go around and the birth rate of the fish decline.

Question 17

What growth function do farmers or those with a resource rent containing a renewable resource aim for?

Answer 17

Maximum sustainable yield - which is the largest possible harvest and requires they, make a sustainable harvest - which is one in which of the size of the stock does not decline over time.

Question 18

Explain how MSY is drawn in a graph?

Answer 18

It is an upside down U, where the slope is maximised, the Sustainable harvest is located, with the maximum sustainable yield number being the mid point.

Question 19

What is the Golden Rule of Growth?

Answer 19

For renewable resources, the Golden rule of Growth, tells profit maximising managers to adjust their harvests up or down so that the Marginal Growth Rate is equal to the interest rate. If the discount rate is high enough or the growth rate low enough, profit maximisation can lead to liquidation of the resource and the investment of the resource rents elsewhere. Generally thought both renewable and non-renewable resource owners do have incentives for profit based conservation.

Question 20

What are ways that that Maximum Sustainable Yield is managed in fisheries? (3)

Answer 20

• Total Allowable Catch - an upper limit
• Individual Transferable Quotas - a cap and trade solution to reduce number of boats.
• Aquaculture - assigning of property rights to fish farmers.

Question 21

What are the problems of Individual Transferrable Quotas?

Answer 21

• consolidation and departure of small players
• political influence over boards and administrators
• bycatch (accidentally caught fish) which are dumped

Question 22

Aquaculture has the potential to significantly reduce pressure on natural fishers, but as currently practiced also generates significant externalities, what are 3 of these?

Answer 22

• Pollution in the form of fish waste, heavy metals, pesticides and antibiotics
• unsustainable harvest of smaller fish (as feed for carnivorous species)
• destruction of local habitats.

Question 23

Why is it difficult to achieve a safe minimum standard of harvest in fisheries?

Answer 23

• disease, weather changes and other environmental changes which alter growth levels

Question 24

Explain the application of safe minimum standard to endangered species?

Answer 24

The SMS is the point where the S curve crosses the 45 degree mark and as a result the species should recover, below this, there are not enough to enable natural reproduction and sustainability resulting in species extinction.

Question 25

Ecosystem management differs from specific resource management for what three main reasons?

Answer 25

1) Joint production - multiple ecosystem services must be managed together
2) Unintended consequences - Management of one system can cause problems for another
3) Spatial analysis - where things happen is important - eg need for right habitat and location.

Question 26

What is one of the findings of ecosystem modelling?

Answer 26

That the value of intact ecosystems can be higher than the value of individual commodities of production that degrade an ecosystem.

Question 27

What is a Payment for Ecosystem Service?

Answer 27

It is a program where landowners agree to certain land use or management practices and are paid for these.