resource economics 1

Question 1

Nonrenewable resources

Answer 1

resources in fixed supply like oil, coal, or minerals - beryllium, cadmium, cobalt, copper, lead, mercury, nickel, palladium, silver, and zinc.

Question 2

Renewable resources

Answer 2

biological resources for which there is a natural growth function

Question 3

Nonrenewable Resources and the Hotelling Model

Answer 3

 Harold Hotelling (1931): a model of nonrenewable resource development. Predicts that over time price would rise, as quantity declines.
 If a firm sells the resource and puts the money in the bank, they earn interest
 A resource in the ground doesn’t earn interest, unless, the price of the resource is likely to rise over time
 This implies, to a degree, ‘Profit-Based Conservation’

Question 4

Hotelling’s Rule

Answer 4

the percentage increase in the resource price ((P2 − P1)/P1) will equal the interest rate (r)

Question 5

Testing the Nonrenewable Resource Model

Answer 5

 Do nonrenewable resource prices tend to rise and quantities tend to fall as suggested by the Hotelling model?
 From ‘67-’01, there was a downward trend in prices
 Two possible explanations:
1. even though there will be scarcity of the resources some time in the future, it is still too far off for it to factor into either consumer or firms’ behavior
2. As technology steadily advances, lower grade ores can be mined cost-effectively, shifting the supply curve down.

Question 5

Peak Oil

Answer 5

 Peak Oil: when oil production hits its high and starts to decline
 In 1956, M. King Hubbert predicted that production of oil in the continental United States would peak in the late 1960s or early 1970s. US Oil production did peak in 1970…
 But rebounded in 2008 Following the introduction of ”fracking” technology

Question 6

Takeaways from 2-period example

Answer 6

1. Those who own resource stock will earn a positive
   resource rent
2. With a positive interest rate the price of the
   nonrenewable resource will increase through time
3. If demand is constant across periods then a rising
   price means falling consumption through time