NATURAL RESOURCE ECONOMICS

3d Module, 2002/2003

Professor: Oleg Eismont

The main goal of the course is to give students the notion of the economic theory which analyzes processes of natural resources extraction, pricing, and consumption, of the role that exhaustible natural resources play in economic development of modern societies. It is assumed that the students are familiar with the graduate course in macroeconomics. The course includes 14 lectures, 6 seminars, and 2 home assignments. Written exam concludes the course. The final grade is the weighted average of the exam (70%) and of home assignments (30%).

The base textbook which covers about 60% of the course - Dasgupta, P.S., and G.H. Heal. "Economic Theory and Exhaustible Resources", Cambridge University Press, 1979. Additional literature is given at the end of each section.

Outline:

1. Basic Theory of Economics of Exhaustible Natural Resources (3 lectures).

“Limits to Growth” as an example of Neo-Malthusian theory. Hotelling rule. Zero extraction costs. Nonzero extraction costs. Exploitation of natural resources with different extraction costs. Exploitation of exhaustible natural resource when alternative inexhaustible resource is available. Exploration and resource additions.

• Meadows, D.H., et.al. “The Limits to Growth”, New York: Universe Books, 1972.
• Dasgupta, P.S., and G.H. Heal. "Economic Theory and Exhaustible Resources", Cambridge University Press, 1979.
• Pindyck R., “The Optimal Exploration and Production of Nonrenewable Resources”, Journal of Political Economy, 1978, vol. 86, 841-861.
• Swierzbinsky J.L., and R. Mendelsohn, “Exploration and Exhaustible Resources: The Microfoundations of Aggregate Models”, International Economic Review, 1989, vol. 30, 175-186.
• Symposium on the Economics of Exhaustible Resources, The Review of Economic Studies, 1974.

2. Natural Resource Exploitation Under Uncertainty (2 lectures).

Uncertainty of natural resource reserves. Uncertainty of production costs of alternative inexhaustible resource. Uncertainty of the time of alternative resource invention. Uncertainty of natural resource price and option theory.

• Dasgupta P., and J. Stiglitz, “Resource Depletion Under Technological Uncertainty”, Econometrica, 1981, vol. 49, 85-104.
• Stiglitz J., and P. Dasgupta, “Market Structure and Resource Extraction Under Uncertainty”, Scandinavian Journal of Economics, 1981, vol. 83, 318-333.

3. Imperfect Competition (2 lectures).

Monopoly on natural resource reserves. Oligopoly. Monopoly on natural resource when alternative inexhaustible resource is available. Natural resource cartel and competitive fringe. Capacity constraints. OPEC example.

Dasgupta, P.S., and G.H. Heal. "Economic Theory and Exhaustible Resources", Cambridge University Press, 1979.

Groot F., C. Withagen and A. de Zeeuw, "Note on the Open Loop von Stackelberg Equilibrium in the Cartel Versus Fringe Model", The Economic Journal, 1992, vol. 102, 1478-1484.

Newbery D., "Oil Prices, Cartels, and the Problem of Dynamic Inconsistensy", The Economic Journal, 1981, vol. 91, 617-646.

4. Taxation of Natural Resources (1 lecture).

Sales tax. Exponentially rising tax. Constant tax. Tax policy and welfare of resource owners and consumers. Profit tax. Capital gains tax. Depletion tax allowance. Royalty. Natural resource taxation and optimal resource extraction. Exploitation of a single natural resource deposit by several owners and optimal taxation.

Dasgupta, P.S., and G.H. Heal, "Economic Theory and Exhaustible Resources", Cambridge University Press, 1979.

7. Empirical Analysis of Natural Resources Exhaustion (1 lecture).

Berck P., and M. Roberts, "Natural Resource Prices: Will They Ever Turn Up?", Journal of Environmental Economics and Management, vol. 31, 65-78, 1996.

8. Production Using Natural Resources (3 lectures).

Economic growth with natural resource as a production factor. Constant savings rate. Natural resource exhaustion and the problem of equity. Rational use of natural resources over time. The role of ethical systems in equitable distribution of exhaustible natural resource consumption between generations (utilitarianism, egalitarianism, elitism). Optimal use of exhaustible natural resources (utilitarian and egalitarian approaches).

• Dasgupta, P.S., and G.H. Heal. "Economic Theory and Exhaustible Resources", Cambridge University Press, 1979.
• Hartwick J., "Intergenerational Equity and the Investing of Rents from Exhaustible Resources", American Economic Review, 1977, vol. 67, 972-991.
• Rawls, J. "A Theory of Justice", Harvard University Press, Cambridge, MA, 1971.
• Solow, R.M. "Intergenerational Equity and Exhaustible Resources", Review of Economic Studies, Symposium on the Economics of Exhaustible Resources, 1974.
• Solow R., "On the Intergenerational Allocation of Natural Resources", Scandinavian Journal of Economics, 1986, vol. 88, 143-154.
• Symposium on the Economics of Exhaustible Resources, The Review of Economic Studies, 1974.

9. Exploitation of Natural Resources in an Open Economy (1 lecture).

• “Dutch Disease”. Short- and long-term effects of the “Dutch disease”.
• Aarrestad J., "Resource Extraction, Financial Transactions and Consumption in an Open Economy", Scandinavian Journal of economics, 1979, vol. 81, 552-565.
• Corden W., "Booming Sector and Dutch Disease Economics: Survey and Cosolidation", Oxford Economic Papers, 1984, vol. 36 (3), 359-380.
• Dasgupta P., Eastwood R., G. Heal, "Resource Management in a Trading Economy", Quarterly Journal of Economics, 1978, vol. 92, 297-306.

10. Natural Resources and National Accounting (1 lecture).

Measure of public welfare. Lagrangean as a measure of public welfare. Lagrangean and net national product. Exhaustion of natural resources and net national product. Sustainability of economic development.

• Maeler, K.-G., "National Accounts and Environmental Resources", Environmental and Resource Economics, 1991, vol. 1, No 1.
• Hartwick, J. "Natural Resources, National Accounting and Economic Depreciation", Journal of Public Economics, 1990, vol. 43, 291-304.
• Vellinga, N., and C. Withagen, "On the Concept of Green National Income", Oxford Economic Papers, 1996, vol. 48, 499-514.
• Weitzman M., “Pricing the Limits to Growth from Minerals Depletion”, Quarterly Journal of Economics, 1999, May, 691-706.