Natural Resource Economics

Group-06

Introduction• What is Natural Resource Economics ?

Natural Resource

Economics

Natural Resources Economics

• Natural Resource– Specific attributes of the environment that are

valued to humans -G. Johnston– Aspects of nature that can be used by humans to

satisfy human wants--Hite & Mulkey• Economics

The study of the production ,processing , distribution and consumption of goods/services in an exchange system

Natural Resource Economics

• Application of economics to manage naturally occurring resources for human needs/wants with efficiency as the primary goal.

Importance of Natural Resource Economics

• Global warming• Ozone Depletion• Acid Deposition• Conservation of Biological Diversity

Classification of Natural Resources

Natural Resources

Production resources

Renewable resources

Non renewable resources

Non Production resources

Flow resources

Fund resources

Biological resources

Recyclable resources

Non recyclable resourcesLife Support

system

Absorptive & Protective system

Aesthetic and recreational system

1. Production Resources• Natural resources provide economics with raw

materials that are turned into goods via process of production.

• Environment also provides a direct service to the consumer.

Ex:-Fuel, Fishery ,Forest, Water

2. Non Production resources• These are the resources which do not have a

direct relationship with the production of goods and services.

• Renewable resourcesRenewable resources are natural resources that

can be replenished in short period of timeEx:- Solar, Water, Biomass, Wind

• Non Renewable resourcesNon renewable resources are natural resources

that cannot be re-made or re-grown at a scale comparable to its consumption

Ex:- Nuclear energy, coal, Petroleum

Renewable resources

1. Flow resourcea.)Non storable• Often indivisible• Inexhaustible (in human span of time)• Time & management relevant only to

consumption, not supplyEx:-Sunshine, Weather, Eco systems, Ocean

waves

b. b.) storable • May be divisible• Time & management relevant to both to

consumption & supply • The services are what are significant for

humans

Storable Flow Resources

Solar

Wind

Wave Energy

Geothermal Energy

Hydrogen Energy WaterHydroPower

2.Fund resources

• Regenerative within human use time frame

• Assumes use within minimum & maximum thresholds

Fund Resources

Timber & Crops

Animals(human & nonhuman

Fish

GrazingLands

Soil & Water Quality

Forests & someUnique ecosystems

3.Biological resources Biological resources refer to the living

landscape, the plants, animals and other aspects of nature and are important to production

Non renewable Resources

1. Recyclable resources• A recyclable resource is one that can be used over

and over, but must first go through a process to prepare it for reuse.

Ex:- Glass, Aluminium

• There is no limit to the number of times these products can be recycled

2.Non recyclable ResourcesNon recyclable resources are those resources

which cannot be used after it has been used once

Ex:- soil, coal, Mineral oil, Natural gases.

Quantitative Expression of Natural Resources

• Nature of Flow resourcesFt = Rt +St +WtFt=Flow resource obtained with in t timeRt=Consumed amount of flow resourcesSt= stored amount of flow resourcesWt=Wasted amount of flow resources

• Nature of fund resources

St= stored fund resource at t timeFt=Fund resource at t timeRt= Consumed amount of fund resourceWt= Wasted amount of fund resource

• Nature of Biological resources

St= Current biological massS0= Biological mass at the beginningHt= Harvested bio mass during t timeRt= Net new addition of bio mass during t time

Economic Evaluation methods of Natural Resources

• The main conceptual principles of economic evaluation methods of natural resources are:

1. Natural resources as asset2. Economic approaches3. Standard Criteria to decision making

1.Natural Resource as an Asset• In economics environment is considered as a complex

asset that provides different services

• It is a very special asset that ensures not only our existence but also development of economics .

• The resources are limited but our wishes are unlimited. • Therefore there is a tendency that the speed of

extraction and use of natural resources is growing to the maximum but the resources are limited.

• Complexity of environmental economics is determined by meeting these contradictive conditions and restrictions.

• It is essential to compare all costs and outcome but also evaluate efficiency of use of natural resources.

Households Firms

Output Market

Factor Market

Demand for g

oods and

services

Supply of Resource

s Demand for ResourcesSupply goods and

services

Expenditu

re

Income

Costs

Revenue

Circular flow model of Economic activity

Natural re

source

s drawn fro

m

nature

Households Firms

Nature

Factor Market

Output Market

Residuals from production

3R3R

Demand for R

esources

Supply for Resources

Residuals f

rom consu

mption

Demand for goods & services

Supply of goods & services

Material Balance Model3R:- Recovery Recycle Reuse

2.Economic Approach

• It provides better understanding about connection between economic system and natural assets.

• Positive economics shows what is, what was and what will be.

• Normative economics answers the question what should be.

• Argument between these economics ensures continuous development and both approaches are important.

Ex:- Positive economic approach

• In order to evaluate dynamics of use of natural resources.

• It helps determine whether use of resources has increased, decreased or has stayed on previous level.

Ex:-Normative economic approach

• To determine whether the speed of utilization of natural resources is acceptable or not and also to analyze possible ways of using natural resources.

3. Normative criteria for decision making

• If it is essential to find out whether the proposed actions are desirable, the first step should be determination of benefits and losses.

• If benefits are higher than losses then action is

desirable.

• This simple system is economic basis in decision making.

• It can be formulated as follows: if B is benefit from use of natural resources and C is costs then:

• o B>C action desirable;• o B< C action to be rejected• o B = C point of no losses

• All benefits and costs are evaluated taking into consideration their effect on development of humankind

Steps proceeded by Normative Analysis

1. Identify an optimal outcome2. Understand extent to which institutions

produce optimal outcomes and where conflicts occur.

3. Design appropriate policy solutions.

Static Efficiency and Dynamic Efficiency

• Comparing benefit- cost analysis occur at different points in time.

• With the consideration of time there are 2 types of efficiency decision making concepts

Static efficiencyDynamic efficiency

Static Efficiency

• An allocation of resources is said to satisfy the static efficiency criterion if the economic surplus derived from those resources is maximized by that allocation.

• Economic surplus is the sum of consumer’s surplus and producer’s surplus.

cost

Benefit

Pareto efficiency

• When the equlibrium of benefit curve and cost curve implise the efiiciency point of resource allocation.

• Pareto EfficiencyWhen the system is in equilibrium can not make

others worse off even though one can not better off.

Dynamic Efficiency

• Benefit-cost analysis requires comparing benefits and costs that usually occur at different points in time.

• The problem is how to compare net benefits in one period with the net benefits received in another time

• The traditional criterion used to find an optimal allocation when time is involved is called dynamic efficiency

– An allocation has achieved dynamic efficiency if it maximizes the present value of net benefits

– Discounting is the process of calculating present value.

• The present value of a one-time net benefits received n years from now is

P V

F Vi n

1

• Present value of a net benefit received in “n” year

PV [ Bn ] = Bn / (1+i)n

– Present value of steam of net benefits receive over “n” period of n year

PV [B1 - Bn ] = ∑ Bn / (1+i)n

i = interest rate.

• According to the dynamic efficiency criterion, the efficient allocation is that maximize present value of net benefits.

• The present value of net benefit for both years is simply the sum of present value in each of the two years.

period1 period2p p

q q

period1 period2

Quantity

priceprice

Dynamically efficient point

P.V of net benefit curve (p1)P.V of net benefit curve (p2)

Conclusions

• Effective use of natural resources promotes development of a country.

• Ineffective use of natural resources decreases potential of sustainable development of a country.

• Ineffective use of resources can also cause considerable losses to environment and economics.

References

• Tietenberg, T. (2005) Environmental and natural resource economics -6th edition-Pearson

• Callan,S.J. &Thomas,J.M. 2004 Environmental Economics & Management-3rd edition, Phoenix

Group Members

• K.K.H.M. Rathnayake UWU/EAG/12/0032• Subadharshani.M

UWU/EAG/12/0038