Natural Resource Economics Midterm Set Critical Set 3

Front 1

Explain “marginal user cost.” (a.) Under what circumstances can we think of it as an “external cost” or “negative externality” associated with each unit of current production of an exhaustible natural resource? (b.) When is this potential externality automatically internalized? (c.) In cases when it is not internalized, can we directly force a firm actually to take into account this negative externality in its production decisions? Or, do we just need to come up with some proxy for these external costs and establish a legal requirement that this proxy amount be paid? (d.) Is the recipient of this payment the same as the victim of the external costs?

Back 1

-Marginal user cost the equalized present discounted value, across periods, of the difference between WTP for the last unit of an exhaustible resource and the marginal extraction costs to produce it. In the two-period case, it is the present value of what must be forgone in the next period if one more unit of the resource is used today

-If a firm is leasing temporary rights to extract an exhaustible resource from public lands, it has no incentive to pay attention to the opportunity costs in the future imposed by its decisions today. We can’t force it to take these costs into account, but we can design a royalty (tax) about the same size as those marginal user costs and legally require the firm to pay this royalty to the government (as a trustee for future generations). The recipient of the payment is not necessarily the same people who will bear the future opportunity cost of the firm’s current extraction decisions, but the government could in principle hold on to those royalty revenues, or invest them in some way that would be advantageous to those future generations (i.e. in technology), if human-made capital can substitute for natural capital

-This is an external cost if it is imposed on a different person in the future by the decisions of one person/firm today. This externality is automatically internalized if the exhaustible resource is privately owned by a firm with secure property rights, because that firm’s decisions will affects its OWN future net benefits (profits), so it has a build-in incentive to pay attention to its own opportunity costs of today’s production

Front 2

What were the origins of the field we now know as “natural resource economics”? In what portion of the broader scope of economics did the subject arise, and how has the focus of the field evolved over the years?

Back 2

-Natural resource economics grew out of programs in agricultural economics, which was traditionally part of the portfolio of Land Grant universities charged with the practical and technical, rather than liberal arts, education of the masses (as opposed to the elites of U.S. society). Forestry economics was an outgrowth of the farming of other crops; fisheries economics was an outgrowth of the farming of livestock. In economics, the “land” of “land, labor, and capital” is generally construed broadly enough to include all natural inputs to production. In the early years, natural resource economics focused on the task of improving the efficiency and profitability of small businesses like family farms and owner-operated fishing boats, etc.

-Over time, as family farming was replaced by mechanized industrial agriculture conducted by large multinationals having their own research departments, agricultural economics departments evolved into agricultural and resource economics departments and the focus of research shifted to the public goods aspects of resource management

-Natural resource economics came to focus more on the management of natural resources to maximize net social benefits, rather than private profits from commercial exploitation. Greater attention came to be devoted to the negative externalities associated with forestry practices, fishing, and mining, and the scope of “natural resources” was expanded to include other types of natural resources, including biodiversity, climate, etc

Front 3

In revealed-preference wage-risk studies, how is the trade-off between money and risk established? What type of risk is most commonly valued? Is this the appropriate type of risk for most environmental problems? Why or why not?

Back 3

Wage-risk studies regress observed wages on actuarial risks of “sudden death in the current period in workplace accidents.” These models also control for other job characteristics and worker characteristics, including industry and occupation. The implied increment to the wage for small differences in risk is the main ingredient in a calculation of the implied “value of a statistical life.” Most environmental risks are not “sudden death now.” Many of the health problems caused by environmental risks involve long periods of latency, followed by some period of sick-time, perhaps followed by recovery or remission (or not), and then some number of lost life-years at the end of life

Front 4

You were introduced to the “hedonic property value method.” Explain this technique. Under what circumstances would this be an appropriate method for measuring, say, the public benefits of clearing invasive milfoil weeds out of lakes that used to be popular for swimming, fishing, and boating (to determine whether these benefits justify the costs of the cleanup)

Back 4

-A property is viewed as a bundle of attributes, including environmental attributes. The selling price for the property as a whole reflects the attributes embodied in it. We regress the selling prices of houses on a vector of housing structure attributes, neighborhood attributes, and environmental quality attributes. The slope coefficients on the environmental attributes provide information about how much people are willing to pay for an additional unit of that attribute.

-It would not be possible to use hedonic property value methods to learn how the quantity of milfoil weed in lakes affects housing prices unless there are a lot of houses near lakes that have more or less milfoil weed. But it is possible that you could find a region of the country with a lot of vacation homes and a lot of lakes, and estimate such a hedonic property value model

Front 5

1. What distinguishes “dynamic” efficiency from “static” efficiency? Why is there always a degree of controversy about “the” discount rate to use when assessing the dynamic efficiency? Are economists confident that a net benefit accruing T periods in the future can always be converted into an equivalent current-period net benefit by multiplying by ? Why or why not?

Back 5

-Static efficiency is said to have been achieved if the optimization problem starts afresh in each period, so all that is necessary is to expand production/consumption as long as the marginal benefits of an extra unit exceed the marginal costs of an extra unit. When marginal benefits equal marginal costs, we maximize overall net benefits associated with a particular activity

-Dynamic efficiency is relevant when decisions in one period affect opportunities in a subsequent period, as in the case of exploiting an exhaustible mineral. In that case, we seek to maximize the present discounted value of the stream of future net benefits. Thus discounting is required. The discount formula shown is merely mathematically convenient. It has the basic necessary property that net benefits accruing sooner will be discounted less, and net benefits accruing later will be discounted more, but there is plenty of evidence that this standard formula isn’t an exact match for the choices that are derived from actual people’s time preferences for present versus future consumption