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ECO 3620. Environmental Economics

Nonrenewable (Exhaustible) Resources

Intertemporal Allocation

  1. Static efficiency: MB = MC
  2. Dynamic efficiency: MB = MEC + MUC
  3. Marginal extraction cost (MEC)
  4. Marginal user cost (MUC, i.e., resource rent)

Discounting and Present Value

  1. FV = PV(1 + r)t
  2. PV = FV/(1 + r)t

Two-Period Model

  1. Marginal net benefits: MNBt = MBt - MECt; t = 0, 1
  2. MUC = MNB1
  3. Intertemporal equilibrium:  MNB0 = MUC/(1 + r)t

Price Path

  1. Competitive markets and the opportunity cost of investment
  2. Hotelling's rule: Pt = MECt + MUCt(1 + r)t
  3. Backstop fuel
  4. Technological improvement
  5. Taxes, subsidies
  6. Monopoly (i.e., OPEC)

Futures Markets

  1. New York Mercantile Exchange
  2. Changes in demand (e.g., population growth)
  3. Changes in supply (i.e., reserves, e.g., exploration and discovery)