Week 6: Energy: Natural Gas, Oil, neclear Flashcards
What are exhaustible resources?
Resources which natural replenishment rate is slow.
These resources can be recycled, however, it will only occur with the price of the primary (virgin) resources is more than the recycled resource (i.e. the value of recycling)
What was Thomas Malthus’ opinion on our exhaustible resources?
- Thomas Malthus – absolute scarcity
- Polution growth is exponential à food production capacity is fixed.
- Policy implications: behaviours must be controlled (e.g. China), control consumption and choice.
What was Harold Hotelling’s opinion on our natural resources?
- Harold Hotelling – Competitive markets will result in efficient allocation of resources through time.
- Buyer and seller expectations about future are reflected in current resource prices.
- Harold asssumed ‘perfect foresight’ in that buyers and seller are fully informed about current and future market conditions (future; demand, supply, production costs, prices) over an infinite time horizon.
Policy implications: Efficient markets are important and future price signal are important. Thus intervention in the market is only necssary to correct market failures.
Run through the US natural gas control.
What is the situation with OPEC?
What is national security?
National security may be considered a public goods.
How do imports undermine national security?
With more imports comes greater exposure to international economic fluctuations, but more importantly creates a reliance on other countries for either key goods and services or key inputs.
Thus, imports have a negative externality from the perspective of the government.
What are the 4 allowed reasons for a tariff?
- risk to health
- Protecting the causes
- Protecting the environment
- National security
What are the policy options to address the public good nature of national security?
5 options
- Tariff on imports
- Quota on imports
- Tax on consumption
- Subsidise domestic production
- Stockpile
How does a tariff on import work?
Introduce a tariff on imports (tax)
- Tax should be set equivalent to the negative externality (national security cost).
How does a Quota on imports work?
Allocate quota to importing firms (grandfathering or auctioning)
Tariff vs quotas
Achieves the same price and same level of domestic and imported units.
Tariff results in revenue for government
Quota: if grandfathered no revenue, if auctioned (revenue)
Both results in higher domestic prices.
- Increases domestic production (increase producer surplus)
Decreases consumer surplus
How does a tax on consumption work?
What are the outcomes for dom and imports?
Does not link to natioanl security costs. Consumers need to pay tax on all consumption (both domestic and imported units).
How does subsidising domestic production work?
Are there any perverse outcomes?
Shift domestic supply to right.
Subsidies have perverse outcomes:
- Overall consumption may increase
- Domestic production will increase, but reserves will be drained faster
Can lead to a long run increased national security issue.
How does stockpile work?
International Energy Agency (IEA) requires member countries to stock piles 90 days of net oil imports (in case of sever oil distrution).
