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Nonrenewable Resources

Humans use a variety of resources whose regeneration rates are too slow to show sufficient increases in stock sizes to be relevant to decision making. Examples include many of the energy sources on which modern economies depend, such as crude oil, natural gas, coal, and uranium, as well as many of the minerals and metals stocks that enter the economy—from iron and copper ores to gravel and sands, to trace minerals important in agriculture and many industrial processes. Other resources could, in principle, be considered renewable—such as tropical forests or fish populations—but current harvest rates are too high to allow for significant regeneration.

Optimal Extraction of Nonrenewable Resources

Given their finiteness, how much of a nonrenew-able resource should be used at any given point in time? The 20th-century economists Lewis Gray and Harold Hotelling were the first to recognize that the conditions for optimal resource depletion are different from the optimality conditions for the production of ordinary goods. A basic assumption is that a nonrenewable resource can be extracted just once. Therefore, optimal prices of a unit of a resource must not only reflect its cost of extraction but also account for the opportunity costs associated with depleting the resource endowment by that unit. Traditional economic models employ positive discount rates to reflect the possibility that technological improvement can give rise to increasing economic wealth and that even though future generations will inherit smaller physical resource endowments, an enlarged stock of human-made resources may compensate for the reduction in the physical resource base.

Challenges for Optimal Resource Extraction Models

Three major issues surround the formulation and application of models of optimal resource extraction: (1) discounting, (2) empirical applicability, and (3) the nature of partial equilibrium analysis of resource use.

Discounting

The choice of the discount rate is vital to the evaluation of economic activities since the discount rate determines whether an action has positive present value of profits or utility, whether it is better than others (has higher present value of profits or utility in the set of possible actions), and whether its timing is optimal (e.g., whether waiting would resolve uncertainty and thus increase present value of profits or utility).

Positive discount rates imply that consumption and production of future periods are valued less than present consumption and production. Once a discount rate has been chosen for evaluating alternative consumption and production plans, the question is whether this rate should remain constant over time. A constant discount rate is appropriate if economic agents assume that the probability of factors affecting the choice among actions remains constant over time. Since the determination of a social discount rate is controversial among economists, assumptions on the rate of change in the discount rate are unlikely to be accepted with consensus.

Empirical Relevance

Although traditional models of optimal extraction of nonrenewable resources are widely accepted among resource economists, empirical evidence for them on the basis of firms’ behaviors is rare and usually disappointing. Despite unreliable data, the lack of empirical support is partly because most models do not explicitly account for a firm's production capacities, capital requirements, capital utilization, and time adjustments in production technologies.

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