allocation Flashcards
potential reserves
can shift due to tech advances (right), exploration (right), and depletion (left)
amount potentially available depending on price
would only equal resource endowment at an infinite price
resource endowment
natural occurrence of resource
total amount
current reserves
can profitably be extracted
physical exhaustion
no more physical quantity is available
economic exhaustion
when costs of obtaining the resource exceed the market value
conservative
relative to some base
use less now, use more later
depletion
use more now, use less later
relative to some base
progressive change
opportunity costs
MUC
dynamic efficiency over a time horizon
MNBn / (1+r)^n
MC increases because -
as you consume more, scarcity of it increases
choke price
max WTP
when it is hit, you will have used up all of the resource
MUC
area between MEC and total MC
results of dynamic efficiency over a time horizon
consumption stops when MC = choke price
smooth transition to exhaustion
use up the entire resource
consumption value
value gained by using it today
asset value
value gained by using it later because price is higher in the future
switch point
go from nonrenewable to renewable
occurs if choke price is > than MC2
results of renewable substitute
MC of the substitute sets the upper list on MC of resource 1
more of the nonrenewable resource is extracted earlier because we still use up the entire resource and upper price lower
results of nonrenewable substitute
rate of increase of MC is lower after the switch point
could be different grades instead of two resource
(better grade; less expensive)
MUC decreasing
extracting today increases extracting in the future
only going to use some of the resource
MUC declines as MEC1 increases
sensitivity analysis
decreases the discount rate
higher initial price, later prices are lower
lower discount rate, same initial price
MUC increases slower and price increases slower
will result in using up before choke price
severance tax
per unit tax on resource
decrease MEC
lower initial price
higher later prices
shortens depletion period
- MUC is higher, MEC drops more than price drops
increase in demand - constant choke price
initial price is higher
less time for depletion
increase in demand - outward shift
initial higher price
less time for depletion
new choke price
exploration
new resources are found and MEC is lowered
smaller and slower decline in consumption
rice in MC is less
price is lower
tech advance
lowers MEC increases consumption
environmental costs
rate of consumption is lower
case of substitutes
- switch to smaller substitutes earlier
- smaller cumulative amount of resource used
