Unit 9: Non Renewable Resources Chapter 5 Flashcards
What is the MARGINAL NET BENEFIT
net benefit of the consumption or production of an additional unit of a resource
=marginal benefit - marginal cost
-largest for 1st units extracted
What happens to the Marginal Net Benefit when Supply and Demand meet
= 0
What is the TOTAL NET BENEFIT
Area under the MARGINAL NET BENEFIT CURVE
=total benefit -total cost
STATIC EQUILIBRIUM
market equilibrium that results when only present costs and benefits considered
What is PRESENT VALUE
Current value of stream of future costs/ benefits
Discount rate used to convert future costs or benefits to present values
What is DISCOUNT RATE
Annual rate at which future benefits or costs are discounted relative to current benefits and costs
What is SUPPLY CONSTRAINT
Upper limit of supply of nonrenewable resource
What is USER COSTS
Costs imposed on future by using resources today
How do we make user costs more sustainable
Reinvestment in
-Human Capital
-Produced Capital
-Renewable Natural Capital
What happens when User Costs are greater than Marginal Benefits
Economic Welfare Reduced
How can we get to Efficient Outcome
Resource Depletion Tax
Direct Gvt control
Private owners may reserve for future (if time periods are short)
What is RESOURCE DEPLETION TAX
tax imposed on extraction or sale of natural resource
-can internalize user costs
What is DYNAMIC EQUILIBRIUM
New market equilibrium-reflects present and future
What is SCARCITY RENT
payments to resource owners in excess of the amount necessary to keep those resources in production
-incentivizes producers to hold off some resources for future
Why is the Discount Rate critical
Optimal allocation of resources depends on this value
What is the Discount Rate if the Present consumption is favoured over future
Anything above 0
What is HOTELLING’S RULE
In equilibrium: resource net price must rise at rate EQUAL to rate of interest
If Present net price + Interest > Probable future net price
Extract now and invest
If expected (future) net price > Present net price + interest
Delay extraction and sell at future date
If Discount (Interest) rates are High
Use Resource now
Present value > Future Value
If Discount (interest) rates are LOW
Greater incentive to conserve
What is OPTIMAL DEPLETION RATE
Depletion rate that maximizes the net present value of the resource
What is HARTWICK RULE
Resource rents should be invested rather than consumed
-Replace diminished resources with produced capital
