NATURAL

RESOURCE
ECONOMICS
Dr. Ir. Yooce Yustiana M.Si
 THE CONCEPT AND FOUNDATION OF THE NATURAL
RESOURCES ECONOMY

1
DEFINITION OF NATURAL
RESOURCES NATURAL RESOURCES PARADIGM
1.Are all biological and non- 1. Conservative / Pessimistic or
biological resources that are 2
Malthusian Perspective
used by humans as a source of
food, raw materials and energy. 2. Exploitative, or Ricardian’s
Perspective
2.Is a factor of production from
nature that is used to provide 3
goods and services in economic
activities
❑ Discharges into the environment (soil, air & water) in the short term may be absorbed by
the environment and not harmful, but over time the capacity and absorptive capacity of the
environment no longer exists so that regeneration is no longer possible. The environment
becomes overburdened beyond its capacity, and causes disruption to the environment, so
it needs to be done in an efficient and effective management of resources and the
environment.

❑ Problems in resource management, namely the problem of efficiency (Efficiency) and

equity (Equity). Efficiency is the maximum consumption of goods and services in the
presence of certain resources, or minimal utilization of resources to produce goods and
services. Equitable distribution is a fair distribution of goods and services among
consumers

TWO EXTREME CONCEPTS ABOUT
SUSTAINABILITY :
1. Weak Sustainability
As long as total capital stock does
not decrease, sustainability can still
be guaranteed
2. Strong Sustainability
The amount of natural resource
stock must not be disturbed
NATURAL RESOURCES IN
SUSTAINABLE DEVELOPMENT
Sustainable Development is
development that can meet the
needs of the present generation
without reducing the ability of
future generations to meet their
needs (Brundtland, 1987)
APPROACH TO SUSTAINABLE DEVELOPMENT
PROCESSES
A. Ecosystem Approach
B. Adaptive Approach

ECOSYSTEM APPROACH

1. Approach based on the relationship between components

2. There must be a discussion of the approach, otherwise it will be
very complex.
3. The approach must be focused on the patterns and processes
that produce the system
4. Data collection must be complete
5. Monitoring must be recorded to be able to provide the necessary
information
6. Research must dare to conduct experiments and make adjustments
7. Collaboration between institutions is needed
8. Institutions must have the courage to make organizational changes
9. That humans are part of the natural system
10. That this approach must include scientific knowledge and human
values ​needs to be considered

❖ Ecosystem Approach is a Holistic Approach, which can be

Comprehensive or Integrated
 WEAKNESS OF THE ECOSYSTEM APPROACH:
• Normative (moral / ethical)
• Informative but not necessarily applicable
• The regulations recommended by this approach may be too strict, under real
conditions it is difficult to apply.

ADAPTIVE APPROACH:
Namely an approach based on ever-changing efforts tailored to the situation at
hand which is always changing, such as environmental events that are full of
risks, uncertainties, complex and full of conflict.
MEASUREMENT OF NATURAL RESOURCES AVAILABILITY
Rees Concept (1990) Usefulness (Kegunaan)
Resources Must Have Two Criteria:
1. There must be knowledge, technology or skills to use it
2. There must be a demand for these resources.
If Both Criteria Are Not Fulfilled: Neutral Goods

A. UNRENEWABLE RESOURCES (STOK)

• Hypothetical Resources
• Speculative Resources
• Conditional Reserves (Kondisi Cadangan)
• Proven Reserves (Cadangan Terbukti)
 B. RENEWABLE RESOURCES (FLOW)

• Maximum Potential of Resources

Measurement of maximum potential is based more on natural biophysical
ability without considering socio-economic constraints.
• Sustainable Capacity (Sustainable Yield)
The availability of resources is measured based on its ability to provide for the
current and future generations
• Absorptive Capacity
or assimilation capacity is the ability of natural resources to recover to absorb
waste due to human activities. This capacity varies due to weather factors and
human intervention
 • Carrying Capacity is based on the idea that the environment has the maximum
capacity to support an organism's growth

MEASUREMENT OF NATURAL RESOURCES SCARCITY

• In general, the scarcity of natural resources is measured physically, by calculating
the remaining economic life, namely by calculating the available economic
reserves divided by the level of extraction. The disadvantages do not pay attention
to economic aspects :
• -Price
• -Cost Extraction
Monetary Measurement Methods (Hanley, 1997):

1. Measurement Based on Real Price

Based on classical economic theory, when the quantity is reduced, consumers must pay
the commodity dearly. The high price reflects the level of scarcity. Weaknesses in this
way, (1) market distortion due to government intervention, (2) the price of natural
resource output only reflects the market price does not reflect the cost of social
opportunities from environmental damage, (3) the use of deflators to measure real prices.

2. Measurement Based on Unit Cost

Based on the principle, that if resources start to become scarce, the costs to extract them
will be even greater. Barnett and Morse (1963), measure the scarcity of resources based
on the Index of Real Unit Cost. Increased scarcity of resources is indicated by an increase
in the Real Unit Cost Index. The advantage of this method is the inclusion of aspects of
technological change in production. Some notes on this method, (1) the difficulty of
measuring capital which is triggered by the development of production technology, (2) the
influence of the input substitution aspect, (3) the estimation of scarcity is based on past
information, so it is not forward looking.
3. Measurement Based on Scarcity Rent
Based on the theory of resource capital, where the rate of return on benefits derived from
natural resource assets, must be equivalent to the opportunity costs of other assets, such
as shares.
Scarcity Rent or Net Price is defined as the difference between the price per unit of output
and the marginal extraction costs.

Rent = P - MC

In addition to economic and physical concepts, measurement of scarcity can be

approached from interactions between the availability of resources (limited or not) and the
cost of extraction over time. Hall and Hall (1984) see there are 4 types of measurements:
a. Malthusian Stock Scarcity
b. Malthusian Flow Scarcity
c. Ricardian Flow Scarcity
d. Ricardian Stock Scarcity
THE ECONOMIC FOUNDATION OF NATURAL RESOURCES

Demand Curve
Neo-Classical Economic Perspective, Demand Curves Can Be Derived From Two
Different Sides:
1. Derived from maximizing satisfaction or utility which will then produce an
ordinary demand curve (Ordinary Demand Curve) or Marshall Demand Curve.
2. Derived from minimizing expenditure that will produce a Compensated
Demand Curve or often called the Hicks Demand Curve.
Neo-Classical Consumer Theory assumes that individuals act rationally and, with all the
constraints, seek to maximize satisfaction with the consumption of two goods, X and Y (Y are
considered composite goods), and services. Satisfaction obtained from consuming the item is
called Utility for goods X and Y or U (X, Y)

Satisfaction is not unlimited, because consumers are limited by fixed income, so it is

mathematically written
max U (X, Y) with constraints M = pₓX + pᵧY
The solution is that the slope of the budget line must intersect with the slope of the utility
function so that optimal consumption is produced for X and Y which are functions of price
and income, or:
Xᴹ = х (pₓ, pᵧ, M) Yᴹ = у (pₓ, pᵧ, M)

Marshall Demand Function

Another alternative to reduce the demand curve, is to minimize
the expenditure with the utility constraint must reach a certain
level of U °: min M = pₓX + pᵧY with constraints U (X, Y) = U ° Then
an optimal value of X and Y will be generated which is a function
of price and utility or:
Xᴴ = х (pₓ, pᵧ, U °) Yᴴ = у (pₓ, pᵧ, U °)

Hicks Demand function

 Geometrically, the MC curve is tangent of TC [[MC (x) = δTC (x) / δx] will
experience a minimum point at X₁ because at this point the slope of the cost
curve = 0. The AC curve is geometrically determined by making a straight line
from point 0 to the curve that intersects the TC (x) curve. Mathematically the AC
(x) curve is derived from TC (x) / x so that the AC curve will reach the minimum
point at the X₂ level.

Min AC(x) = δAC(x)/δx = 0 For example the Profit Function

= [δTC(x)/δx]X - TC(x) = 0 Π= px – C(x)
X² Then the maximum profit
= δTC(x) /δx . X= TC(x)
P = δC/δx = MC(x)
= δTC(x) = TC(x)
δX X Mean : P = MC
That Mean MC = AC
Π = X [p - C (x) / x]

p <C (x) / x; that if p <AC then the profit is negative

Surplus
The concept of surplus: (1) places monetary value on the welfare of the
community from extracting and consuming natural resources, (2) economic
benefits which are the difference between gross benefits and the costs
incurred by the community to extract natural resources

Green (1992), using a surplus approach to measure the benefits of natural

resources is an appropriate measurement because the use of resources is
considered to be the best alternative alternative (best alternative use)
ECONOMIC SURPLUS:
1. Consumer Surplus
2. Producer Surplus
3. Resource Rent or Resource Rent

Consumer Surplus, equals the benefits that society receives

from consuming SDA U (x) minus the amount paid to consume
the item xp (x). Consumer surpluses can measure people's
willingness to pay for goods / natural resources.
Mathematically:
CS (x) = U (x) - xU ’(x)
= U (x) - xp (x)
PRODUSER SURPLUS
Producer Surplus (PS) is the minimum payment that can be received by producers
reduced by the cost to produce goods X. SP can also be considered as a surplus that
can be obtained by the owner of the resource or productive assets when the
income from the resource exceeds the utilization cost. SP measurement can be
done by finding the area above the supply curve that is limited by the price line.

PSᵪ₀ = P₀X₀ - ʃˣ MC (X) dx

RENTED RESOURCES
Resource rent is a surplus that can be enjoyed by the owner of the
resource (for example the government) which is the difference
between the amount received from the utilization of resources
reduced by the costs incurred to extract it. Mathematically resource
rents can be written:
RR (x) = x [U '(x) - C' (x)]
Total Surplus From Natural Resources:
SS = [U ’(x) - xU’ (x)] + [xC ’(x) - C (x)] + x [U’ (x) - C ’(x)]
 DISCOUNTING

Natural resource extraction is INTERTEMPORAL. This is

caused by assets or capital whose use is not only
determined by the productivity of the capital, it also
concerns the availability for future consumption, as well
as the risk and uncertainty of natural resource extraction.
From the producer side, it involves the Opportunity Cost.
From the consumer side, it concerns the time preference
TERIMA KASIH