Exhaustible Resource Allocation.

By
George Taako Edema
 Objectives
 The objectives of this lecture are to;
1. To explain explicitly the natural resource classification
2. To promote an understanding of the role of long time
horizon, substitutes and extraction costs in the allocation of
exhaustible resource.
3. To provide an explanation of how society react when a
finite resource becomes scarce.
 The natural resource taxonomy
 Natural resource taxonomy simply refer to a system of
classification of natural resources.
 The stock of resources that can be depleted can be classified
into three concepts;
1. Current reserves- refers to the known resources that can
profitably be extracted at current prices. The size of the
current reserve can be expressed as a number.
2. Potential reserve- refers to amount of reserve potentially
available contingent on the price people are willing to pay
for these resources.
Cont.
 The higher the price, the larger the potential reserve.
 For example, the additional oil that could be recovered from
existing oil fields by enhanced recovery techniques, such as
injecting solvent or steam into the well to lower the density of
oil, find that as the price is increased the amount of
economically recoverable oil also increase.
3. Resource endowment- this is the natural occurrence of
natural resources in the earth’s crust. This represents an upper
limit on the availability of terrestrial resources.
Cont.
 It must be noted that;
i. Data on current reserve does not represent the maximum
potential reserve as it has always been mistaken.
ii. The entire resource endowment can not be made available
as potential reserve at a price people are willing to pay
because infinite price is unlikely.
 Exhaustible resource- is a resource for which the natural
replenishment is so low that it does not offer a potential for
augmenting the stock in any reasonable time frame.
Cont.
 Recyclable Resource- is a natural resource although
currently being used for some particular purpose, exists in a
form allowing its mass to be recovered once that purpose is
no longer desirable e.g. copper and steel in automobiles.
 The current reserve of exhaustible recyclable resource can be
increased by;
• Economic replenishment which includes;
Cont.
i. The role of price- as price rises, producers find it profitable
to explore more widely, dig more deeply and use lower –
concentration ores.
ii. The rise in the price of resource stimulates technological
progress. For example the successful harnessing of nuclear
power is because of this factor.
Cont.
 Recycling – the rate of recycling a natural resource is
influenced by;
• The price of the resource
• The degree of scarcity
• The advance in recycling technologies
• Other considerations such as environmental impact of use
of the product made using the natural resource.
 Exhaustible recyclable resource can be exhausted in the very
long run and this is influenced by;
Cont.
• The demand for the products made out of the resource
• The ability to use the resource
• The ability to re-use the product made out of the natural
resource
• The durability of the product made out of the resource.
Durable products last longer, reducing the demand for
newer ones.
• Societies ability to store the resource e.g. helium that is
associated with oil and gas has no feasible storage
technology at the current helium price.
Cont.
 Exhaustible non-recyclable resource – exhaustible
resource that can not be recycled or re-used e.g. energy
resources such as coal, oil and gas. Once these energy
resources are combusted and turned into heat energy, the heat
dissipates into the atmosphere and becomes non recoverable.
 Renewable resources- natural resources where natural
replenishment augments the flow of the resource at a non
negligible rate e.g. solar energy, water, fish, forest, animals
etc.
Cont.
 However, the augmentation of the flow of the natural
resource by natural replenishment can not go on indefinitely
because of;
• Human activities such as deforestation, overfishing
• Soil erosion and nutrient depletion
 Some of the renewable resources can be stored while others
can not. Where storage is possible, inter-generation equity
promotion does not pose a significant challenge.
Cont.
 Storage of an exhaustible resource facilitates the extension of
the economic life of the natural resources.
 Storage of a renewable resource is a way of resolving
cyclical imbalances of demand and supply for the resource by
storing surpluses for use during periods when shortages occur
e.g. use of dams to store water to be used for hydropower or
irrigation when drought occurs.
 Given the above resource taxonomy, the challenges of
managing exhaustible resource and renewable resources are
significant but varied.
Cont.

 The challenge of managing exhaustible

resource involves allocating dwindling
stocks among generations while meeting the
ultimate transition to renewable resources.
On the other hand, the challenge of
managing renewable resources involves the
maintenance of an efficient sustainable flow.
 Efficient Intertemporal allocation
 Since the challenge of management of resources is allocation
of the resources overtime, the relevant efficiency concept is
dynamic efficiency.
 Dynamic efficiency criterion assumes that society’s objective
is to maximize the present value of net benefits coming from
the resource.
 In the case of an exhaustible non recyclable resource, requires
balancing of the current and subsequent use of the resource
which is dependent on;
Cont.
• The resource endowment which is fixed or finite in supply
• The demand for the resource
• The marginal cost of extraction
• The marginal user cost- the opportunity cost measure that
allows intertemporal balancing to take place.
• Availability of renewable resource substitute.
• Exploration and technological progress
 Assignment
1. Explain with numerical examples the Two-Period Model
and N-Period Constant – Cost case of exhaustible resource
allocation.
2. Discuss the role of longer time horizon, renewable resource
substitute, resource extraction costs in the allocation of
exhaustible resource over time.
 Reading reference:
 Tom Tietenberg and Lynne Lewis (2014), environmental and
resource economics (9th edition), Pearson Education, Page
133- 146