Non-Renewable Resources

Natural Resources and Environmental Economics

(ECEU 606200 – 3 SKS)

Semester Genap 2020/2021

1
Kategori SDA: non-renewable,
renewable
Non-renewable ≈ depletable

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Chapter 5 – Resource Allocation Over
Time
Non-renewable resource model: Two
time period
-We know the limited amount
-How should we allocate over time?
-Two period model, meaning exploit
immediately or wait, exploit later

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Figure 5.1: Supply and Demand for Copper

Supply

.
Ps = 50 + 0.25Q
Equilibrium

Demand
Pd = 150 - 0.25Q
Figure 5.2: Marginal Net Benefit for Copper

MNB = 100 – 0.5Q

Figure 5.3: Allocation of Copper over
Two Time Periods

MNB1 MNB2

PV[MNB2]

Q1
Q2
Figure 5.4: Optimal Intertemporal
Resource Allocation

MNB1

PV[MNB2]
A
B
Q1
Q2 250 200 150 100 50 0
 Figure 5.5: Suboptimal Intertemporal
Resource Allocation

MNB1

PV[MNB2]

A1
B2 B1
A2
Q1
Q2 250 200 150 100 50 0
Figure 5.6: Market for Copper with User Costs (First
Period)
S’ with User Costs
STax

Supply

Demand
Figure 5.7: Market for Copper (Second Period)

Demand
 Figure 5.8: Intertemporal Resource Allocation
with Different Discount Rates
PV[MNB2] at:

0%

MNB1 2%

5%

7%

10%
15%

20%
30%

Q1
Q2 250 200 150 100 50 0
Table 5.1: Intertemporal Resource Allocation
with Different Discount Rates
Discount Rate
(1 + r)10 Q1 Q2
(%)
0 1 125 125

2 1.2 132 118

5 1.6 143 107

7.5 2 150 100

10 2.6 158 92

15 4 170 80
Figure 5.9: Hotelling’s Rule on
Equilibrium Net Resource Price
 Resource taxonomy

•Current reserves (stock, cadangan)

•Potensi cadangan (potential reserves)
•Sumberdaya (resource endowment)

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 Perbedaan taksonomi

•Perbedaan ketiga konsep signifikan

•Kesalahan:
• Memakai current reserves sebagai max
potential reserves
• Asumsi endowment reserves dapat menjadi
potential reserves pada harga yang orang
willing-to-pay

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 Taksonomi lain

•Identified resources
•Measured resources
•Indicated resources
•Inferred resources Con
fide
•Undiscovered resources nce
leve
•Hypothetical resources l

•Speculative resources

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 Figure 17.1: Classification of Nonrenewable
Resources
Identified Undiscovered

Hypothetical Speculative (in

Demonstrated Inferred (in known undiscovered
districts) districts)
Economic

Inferred

Increasing Economic
Reserves
Reserves

Feasibility
Subeconomic

Subeconomic Subeconomic
Reserves Inferred
Reserves

Increasing Geologic Assurance

Sources: Rocky Mountain Institute, http://www.rmi.org/RFGraph-McKelvey_diagram_for_coal_gas_resources.
Note: Several resource classification schemes have been developed that differ slightly from the one above. See, for example, U.S. Bureau of
Mines and U.S. Geological Survey, 1976.
•Depletable resource – feedback loop
can be safely ignored (fossil fuel)
•Recyclable resource – logam/besi
•Renewable resource – energi matahari

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 Figure 17.2: Nonrenewable Resource
Production Decisions
Price

MC

P
A

Q* Qm Quantity
Source: Adapted from Hartwick and Olewiler, 1998, which provides a more advanced discussion of the economic theory of nonrenewable
resource extraction.
 Figure 17.3: Hypothetical Nonrenewable
Resource Use Profile
Choke Stage I Stage II Stage III Stage IV
Price
Price
Quantity Extracted

Time
Source: Adapted from Hartwick and Olewiler, 1998.
 Figure 17.4: Prices for Selected Minerals,
1990-2015
Copper

Zinc

Aluminum

Lead

Source: U.S. Geological Survey, Minerals Commodities Summaries, various years.

 Figure 17.5: Global Economic Reserves for
Selected Minerals, 1996-2016
Copper

Zinc

Lead

Source: U.S. Geological Survey, Minerals Commodities Summaries, various years

 Table 17.1: Expected Resource Lifetimes,
Selected Minerals
2015 global Expected resource
production Global reserves lifetime, years
(thousand metric (thousand metric (static reserve
Mineral tons) tons) index)
Aluminum 274,000 28,000,000 102
Cobalt 124 7,100 57
Copper 18,700 720,000 39
Iron ore 3,320,000 85,000,000 26
Lead 4,710 89,000 19
Lithium 32.5 14,000 431
Mercury 2.34 600 256
Nickel 2,530 79,000 31
Tin 294 4,800 16
Source: U.S. Geological Survey, Minerals Commodities Summaries, 2016.
Note:Tungsten 87 of aluminum.
Aluminum data for bauxite ore, the primary source 3,300 38
 Table 17.2: Potential Environmental Impacts
of Mining
Activity Potential Impacts
Excavation and ore ∙ Destruction of plant and animal habitat, human
removal settlements, and other features (surface mining)
∙ Land subsidence (underground mining)
∙ Increased erosion; silting of lakes and streams
∙ Waste generation
∙ Acid drainage and metal contamination of lakes,
streams, and groundwater
Ore concentration ∙ Waste generation (tailings)
∙ Organic chemical contamination
∙ Acid drainage and metal contamination
Smelting/refining ∙ Air pollution (including sulfur dioxide, arsenic, lead,
cadmium, and other toxics)
∙ Waste generation (slag)
∙ Impacts of producing energy (most energy used for
mineral production goes into smelting and refining)

Source: Young, 1992.

 Figure 17.6: Impact of Recycling on Virgin
Resource Extraction Path
Resource Stage III Stage IV
Supply Total
Supply

Extraction Path
without Recycling Supply from
Recycled Materials

Supply from
Virgin Resource

Time
 Figure 17.7: Marginal Costs of Recycling
Marginal MCr
Costs

MSCv

MPCv

0% 40% 60% 100%

Proportion of Supply Obtained from Recycled Materials
Bagaimana membagi pemanfaatan
cadangan yg ada antar generasi?
 Efficient
intertemporal
allocation
Sumberdaya tak
terbarukan (tidak bisa
didaur ulang), memerlukan
balancing the current and
subsequent use of
resources.

The objective is to max

PVNB

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• In the two-period model, the marginal cost of
extraction is assumed to be constant, but the
value of the marginal user cost rises over time.
• Fixed and finite supplies of resources,
production decisions today must take forgone
future net benefits into account.
• The increasing opportunity cost drives
marginal user cost when the MC of extraction
is constant.

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Hotelling rule

•Marginal user cost increase at the

rate of interest
•Non renewable resource stocks
should increase in the value at a rate
equal to other type of assets in the
market

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If oil stocks in the ground were gaining in value
at a rate faster than the rate of interest,
resource owners would extract nothing in the
near term, leaving stocks in the ground to
increase in value relative to money in the bank.
If oil stocks in the ground were gaining in value
at a rate slower than the rate of interest,
resource owners would d better to extract all of
the oil, sell it, and invest the proceeds.

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•Oil in the ground generates returns for its
owner over time. It is a capital asset that
can be spent today (through extraction)
or saved for tomorrow. The price of
spending it today is the lost scarcity rent
it would generate by remaining in the
ground. Likewise, the return to saving it
for tomorrow is the rate of increase in
scarcity rent.

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•private owners of capital cannot
increase their profits by reallocating their
portfolios—if they could make more
money by holding less capital in oil and
more in some other asset, or vice versa,
private owners would take advantage
of that opportunity

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N-period constant cost

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N-period
constant cost
Constant marginal cost
Increasing marginal user cost
Falling quantities consumed

Total marginal Cost=sum of

marginal extraction cost +
marginal user cost

Marginal user cost=scarcity

rent

Choke price: max willingness

to pay sets the upper limit on
the total marginal cost when
no substitute is available

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•Total marginal cost is increasing
•The increasing marginal user cost
reflects increasing scarcity and the
accompanying rise in the opportunity
cost of current consumption
•Extracted quantity falls over time until it
reaches to zero (Choke price)

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Transisi: Depletable to Depletable

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Transis

•TMC1=TMC2 titik transisi

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Transisi: Depletable to a renewable
resource

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Transisi: D to R
increasing MEC Case

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•At a switch point, the opportunity cost of
current extraction drops to zero, and the
total marginal cost equals the marginal
extraction cost

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• Therefore, as the current marginal cost rises
over time, the sacrifice made by future
generations (as an additional unit is
consumed earlier) diminishes; the net benefit
that would be received by a future
generation, if a unit of the resource were
saved for them, gets smaller and smaller as
the marginal extraction cost of that resource
gets larger and larger.

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 Explorasi dan Teknologi

•Mencari SD baru mahal

•Marginal cost of exploration=MC
mencari SD baru dengan setiap
pertambahan unit SD, akan meningkat
over time

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 Environmental cost

•Environmental cost that are not

internalized by producers is one of the
biggest failing of property rights structure
•Two problem:
• The price of the depletable resource is too
low
• The extraction of the depletable resource is
too high

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Environmental cost

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 Reference:
• TT2
• KO4: Competitive market equilibrium
• KO5: Market failures in environmental
realm

Department of Economics
Gedung Departemen Ilmu Ekonomi, Lt. 2
Jl. Prof. Dr. Sumitro Djojohadikusumo. Kampus UI Depok, Jawa Barat 16424 Indonesia
T : 021 727 2425, 727 2646 ext. 403, F : 021-786.3559
Website : http://econ.feb.ui.ac.id/
E-mail : depie@ui.ac.id
@DepIE_FEBUI @depie_febui Departemen Ilmu Ekonomi UI Departemen Ilmu Ekonomi UI
Kelangkaan
Diket: P= 8–0.4q; C = 2
Net benefit (NB)= P – C;
Total net benefit = (P-C)q
MNB=dTB/dQ which is MNB= P-C
Q* = 15; P* = 6
Untuk 2 periode perlu 30 cadangan
Kalau cadangan hanya 20?
Ada marginal user cost krn ada
kelangkaan. Langka maka ada
opportunity cost bila digunakan skrg krn
tdk bisa digunakan yad
 Diket: P= 8–0.4q; C = 2
Net benefit (NB)= P – C;
Total net benefit = (P-C)q
MNB=dTB/dQ
Kriteria: MNBPERIODE1 = PV MNBPERIODE2
Kriteria: PV MNBPERIODE1 = PV MNBPERIODE2
Q1* = 10.238; Q2* = 9.762
Marginal user cost: 1.905
P1 = 3.905; P2 = 4.095 (1+r) P1 = P2
 Discounting

•https://www.youtube.com/watch?v=M
ol1yT7tczY&t=2s

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