Chapter Four

Natural Resources
Part II
 Optimal depilation of renewable resources

*Environmental resources are described as renewable

when they have a capacity for reproduction and
growth.

*The class of renewable resources is diverse.

*It includes populations of biological organisms such
as fisheries and forests which have a natural capacity
of growth, and water and atmospheric systems which
are reproduced by physical or chemical processes.
*While the latter do not possess biological growth
capacity, they do have some ability to assimilate
pollution inputs (thereby maintaining their
quality) and, at least in the case of water
resources, can self-replenish as stocks are run
down (thereby maintaining their quantity).
*It is also conventional to classify arable and
grazing lands as renewable resources. In these
cases reproduction and growth take place by a
combination of biological processes (such as the
recycling of organic nutrients) and physical
processes (irrigation, exposure to wind, etc.).
* Fertility levels can regenerate naturally so long as the
demands made on the soil are not excessive. We may
also consider more broadly defined environmental
systems (such as wilderness areas or tropical moist
forests) as being sets of interrelated renewable
resources.
*A broad concept of renewables would also include flow
resources such as solar, wave, wind and geothermal
energy.
*These share with biological stock resources the property
that current harnessing of the flow does not mean that
the total magnitude of the future flow will necessarily
be smaller. Indeed, many forms of energy-flow
resources are, for all practical purposes, non depletable.
*It is important to distinguish between stocks and flows of
the renewable resource.
*The stock is a measure of the quantity of the resource
existing at a point in time, measured either as the
aggregate mass of the biological material (the biomass)
in question (such as the total weight of fish of particular
age classes or the cubic metres of standing timber), or in
terms of population numbers.
*The flow is the change in the stock over an interval of
time, where the change results either from biological
factors, such as ‘recruitment’ of new fish into the
population through birth or ‘exit’ due to natural death, or
from harvesting activity.
*One similarity between renewable and nonrenewable
resources is that both are capable of being fully
exhausted (that is, the stock being driven to zero) if
excessive and prolonged harvesting or extraction
activity is carried out.
*In the case of non-renewable resources, exhaustibility
is a consequence of the finiteness of the stock.
*For renewable resources, although the stock can grow,
it can also be driven to zero if conditions interfere with
the reproductive capability of the renewable resource,
or if rates of harvesting continually exceed net
natural growth.
*It is evident that enforceable private property rights do
not exist for many forms of renewable resource.
*In the absence of regulation or collective
control over harvesting behavior, the resource
stocks are subject to open access.
*We will demonstrate that open-access resources
tend to be overexploited in both a biological and
an economic sense, and that the likelihood of
the resource being harvested to the point of
exhaustion is higher than where private property
rights are established and access to harvesting
can be restricted.
A. Biological growth progress
* In order to investigate the economics of a renewable
resource, it is first necessary to describe the pattern of
biological (or other) growth of the resource.
* To fix ideas, we consider the growth function for a
population of some species of fish. This is conventionally
called a fishery.
* We suppose that this fishery has an intrinsic (or potential)
growth rate denoted by g.
* This is the proportional rate at which the fish stock would
grow when its size is small relative to the carrying capacity
of the fishery, and so the fish face no significant
environmental constraints on their reproduction and
survival.
*Here, we will use a biological model originally
proposed by Schaefer (1957). And the model uses a
particular average relationship between the growth
of the fish population and the size of the fish
population.
*This is an average relationship in the sense that it
abstracts from such influences as water temperature
and the age structure of the population.
*The model therefore does not attempt to
characterize the fishery on a day-to-day basis, but
rather in terms of some long-term average in which
these various random influences tend to
counterbalance each other.
* We can represent this average relationship using the
following graph.
Growth in
stock of
fish

G(S*)

G()

Fish stock
(tons)

* The size of the population is represented on the horizontal axis

and the growth of the population on the vertical axis.
* Over the range of population sizes ( - S* ) population growth
increases as population increases, and over range (S* - )
increase in population lead to eventual declines in growth.
* And at points and the population growth will be zero.
* is known as the natural equilibrium, and this is population
size that would persist in the absence of outside influences.
* Reductions in the stock due to mortality or out-migration
would be exactly offset by increases in the stock due to
births, growth of the fish in the remaining stock, and in-
migration.
* This natural equilibrium would persist because it is stable. A
stable equilibrium is one in which movements away from this
population level set forces in motion to restore it.
*If, for example, the stock temporarily exceeded , it
would be exceeding the capacity of its habitat. As a
result, mortality rates or out-migration would increase
until the stock was once again within the confines of
the carrying capacity of its habitat.
*This tendency for the population size to return to works
in the other direction as well. Suppose the population is
temporarily reduced below . Because the stock is now
smaller, growth would be positive and the size of the
stock would increase. Over time, the fishery would
move along the curve to the right until is reached
again .
* known as the minimum viable population, represents
the level of population below which growth in
population is negative.
* In contrast to ,this equilibrium is unstable. Population sizes
to the right of lead to positive growth and a movement along
the curve away from . When the population moves to the left
of , the population declines until it eventually becomes
extinct, and in this region, no forces act to return the
population to a at least viable level.
* A catch level or harvest size is said to represent a sustainable
yield whenever it equals the growth rate of the population,
since it can be maintained forever. As long as the population
size remains constant, the growth rate (and hence the catch)
will remain constant as well.
* S* is known in biology as the maximum sustainable yield
population, defined as the population size that yields the
maximum growth; hence, the maximum sustainable yield
(catch) is equal to this maximum growth and it represents the
largest catch that can be perpetually sustained.
* Since the catch is equal to the growth, the sustainable yield
for any population size can be determined by drawing a
vertical line from the stock size of interest on the horizontal
axis to the point at which it intersects the function, and
drawing a horizontal line over to the vertical axis.
* For example, if the stock size is , the corresponding growth
level will be G(), and if the harvester catches only G() amount
then the population size can be maintained for longer period
of time.
* And G(S*) will be the maximum sustainable yield.
 Static efficient sustainable yield
* The static efficient sustainable yield is the catch level that, if
maintained perpetually, would produce the largest annual
net benefit.
* We condition our analysis on three assumptions that simplify
the analysis without sacrificing too much realism:
1. The price of fish is constant and does not depend on the
amount sold.
2. The marginal cost of a unit of fishing effort is constant.
3. The amount of fish caught per unit of effort expended is
proportional to the size of fish population (the smaller the
population, the fewer fish caught per unit of effort).
* The static efficiency point can be determined using the
following graph.

* The net benefit is presented in the diagram as the difference

(vertical distance) between benefits (prices times the
quantity caught) and costs (the constant marginal cost of
effort times the units of effort expended).
* The efficient level of effort is , and at this effort level the
vertical distance between benefits and costs is maximized.
* is the efficient level of effort because it is where marginal
benefit (which graphically is the slope of the total benefit
curve) is equal to marginal cost (the constant slope of the
total cost curve).
* Since at the marginal benefit is lower than marginal cost,
the efficient level of effort is less than that necessary to
harvest the maximum sustainable yield.
* Thus, the static efficient level of effort leads to a larger fish
population, but a lower annual catch than the maximum
sustainable yield level of effort.
* What will happen to the efficient harvesting effort and
harvest size if there is technological progress that could
decrease marginal cost?
 Market solution
* Let’sfirst consider the allocation resulting from a fishery
managed by a competitive sole owner. A sole owner would
have a well defined property right to the fish.
* A sole owner would want to maximize his or her profits.
* The owner can increase profits by increasing fishing effort
until marginal revenue equals marginal cost. This occurs at
effort level , and yields positive profits equal to the
difference between R() and C().
* Inocean fisheries, however, sole owners are unlikely.
Ocean fisheries are typically open-access resources no one
exercises complete control over them.
* Since the property rights to the fishery are not conveyed to
any single owner, no fisherman can exclude others from
exploiting the fishery.
* Open-access resources create two kinds of external costs: a
contemporaneous external cost and an intergenerational
external cost.
* The contemporaneous external cost, which is borne by the
current generation, and it involves the over commitment of
resources to fishing like too many boats, too many fishermen,
too much effort.
* As a result, current fishermen earn a substantially lower rate of
return on their efforts.
* The intergenerational external cost, borne by future generations,
occurs because overfishing reduces the stock, which, in turn,
lowers future profits from fishing.
* Once too many fishermen have unlimited access to the same
common-pool fishery, the property rights to the fish are no
longer efficiently defined.
* Open access results in overexploitation. How?
* The sole owner chooses not to expend more effort than
because to do so would reduce the profits of the fishery,
resulting in a personal loss to him/her.
* When access to the fishery is unrestricted, a decision to
expend effort beyond reduces profits to the fishery as a
whole but not to that individual fisherman. Most of the
decline in profits falls on the other fishermen.
* In an open-access resource, the individual fisherman has an
incentive to expend further effort until profits are zero.
* That point is at effort level at which average revenue and
average cost are equal.
* As the existing population is overexploited, the open-access
catch would initially be higher, but as population growth
rates are affected, the steady-state profit level, once
attained, would be lower.
* Open-access fishing may or may not pose the threat of
species extinction.
* It depends on the nature of the species and the benefits and
costs of an effort level beyond .
 Public policy towards fishery
1. Aquaculture ;
* Promoting private ownership of fisheries.
* This approach can work when the fish are not very mobile,
when they can be confined by artificial barriers, or when
they instinctively return to their place of birth to spawn.
2. Rising the real cost of fishing
3. Tax
4. Transferable quota and catch shares
5. Subsidy
 Forest
* Managing forests is no easy task. In contrast to crops such
as cereal grains, which are planted and harvested on an
annual cycle, trees mature very slowly.
* The manager must decide not only how to maximize yields
on a given amount of land but also when to harvest and
whether to replant. In addition, a delicate balance must be
established among the various possible uses of forests.
* Since harvesting the resource diminishes other values (such
as protecting the aesthetic value of forested vistas or
providing habitat for shade-loving species), establishing the
proper balance requires some means of comparing the value
of potentially conflicting uses.
* One serious problem, deforestation, has intensified climate
change, decreased biodiversity, caused agricultural
productivity to decline, increased soil erosion and
desertification, and precipitated the decline of traditional
cultures of people indigenous to the forests.
* Instead of forests being used on a sustainable basis to provide
for the needs of both current and subsequent generations,
some forests are being “cashed in.”
Forest harvesting decision
Special attribute of timber resources
* Timber shares with many other animate resources the
characteristic that it is both an output and a capital good.
* Trees, when harvested, provide a salable commodity, but left
standing they are a capital good, providing for increased
growth the following year.
* Each year, the forest manager must decide whether or not to
harvest a particular stand of trees or to wait for the additional
growth.
* In contrast to many other living resources, however, the time
period between initial investment (planting) and recovery of
that investment (harvesting) is especially long.
* Forestry is subject to an unusually large variety of
externalities, which are associated with either the standing
timber or the act of harvesting timber.
 The biological dimension
*Tree growth is conventionally measured on a volume
basis, typically cubic feet, on a particular site.
*This measurement is taken of the stems, exclusive of
bark and limbs, between the stump and a four-inch top.
For larger trees, the stump is 24 inches from the ground.
*Only standing trees are measured; those toppled by
wind or age are not included. In this sense, the volume
is measured in net, rather than gross, terms.
*Based on this measurement of volume, the data reveal
that tree stands go through distinct growth phases.
Initially, when the trees are very young, growth is rather
slow in volume terms, though the tree may experience a
considerable increase in height.
*A period of sustained, rapid growth follows, with
volume increasing considerably.
*Finally,slower growth sets in as the stand fully
matures, until growth stops or decline sets in.
*The actual growth of a stand of trees depends on
many factors, including the weather, the fertility of
the soil, susceptibility to insects or disease, the type
of tree, the amount of care devoted to the trees, and
vulnerability to forest fire or air pollution.
*Thus, tree growth can vary considerably from
stand to stand. Some of these growth-enhancing or
growth-retarding factors are under the influence of
foresters; others are not.
*Abstracting from these differences, it is
possible to develop a hypothetical but realistic
biological model of the growth of a stand of
trees.
*Our model, as shown in figure below is based
on the growth of a stand of Douglas fir trees in
the Pacific Northwest.
*Notice that the figure is consistent with the
growth phases listed above, following an early
period of limited growth in its middle ages,
with growth ceasing after 135 years.
 Economics of forest harvesting
*From the definition of efficiency, the optimal harvest
time (age) would maximize the present value of the net
benefits from the wood.
*The size of the net benefits from the wood depends on
whether the land will be perpetually committed to
forestry or left to natural processes after harvest.
*For our first model, we shall assume that the stand will
be harvested once and the land will be left as it is
following the harvest.
*We also shall assume that neither the price (assumed to
be $1) nor the harvesting costs per cubic meter ($0.30)
vary with time.
*Having specified these aspects of the model, it is now
possible to calculate the present value of net benefits
that would be derived from harvesting this stand at
various ages.
*The net benefits are calculated by subtracting the
present value of costs from the present value of the
timber at that age.
*Three different discount rates are used to illustrate the
influence of discounting on the harvesting.
* when r = 0, r = 0.01, r = 0.02, r = 0.04
*First, discounting shortens the age of the
efficient harvest.
*Notice that the maximum undiscounted net
benefits occur at an age of 135 years, when the
volume is maximized.
*However, when a discount rate of only 0.02 is
used, the maximum net benefits occur at an age
of 68 years, roughly half the age of the
undiscounted case.
*Higher discount rates imply younger harvesting
ages because they are less tolerant of the slow
timber growth that occurs as the stand reaches
maturity.
 Extending the model
*In the infinite planning horizon model, harvested lands
are restocked and the sequence starts over again in a
never-ending cycle.
*The single-harvest model we developed would be
appropriate for an infinite planning period if and only if
all periods were independent (meaning that decisions in
any period would be unaffected by anything that went
on in the other periods).
*If interdependencies exist among time periods,
however, the harvesting decision must reflect those
interdependencies. How?
* Interdependencies do exist. The decision to delay a harvest
imposes an additional cost in an infinite planning model that
has no counterpart in our single harvest model the cost of
delaying the on set of the next planting and harvesting cycle.
* In the infinite-planning horizon case, the opportunity cost of
delaying the next cycle, which has no counterpart in the
single stand model, must also be covered by the gain in tree
growth.
* The effect of including the opportunity cost of delay in an
infinite horizon model can be rather profound.
* Assuming that all other aspects of the problem (such as
planting and harvesting costs, discount rate, growth function,
and price) are the same, the optimal time to harvest (called
the optimal rotation in the infinite planning case) is shorter
in the infinite-planning case than in the single-harvest case.
*This follows directly from the existence of the
opportunity cost of delaying the next harvest.
The efficient forester would harvest at an
earlier age when he or she is planning to
replant the same area than when the plot will
be left inactive after the harvest.