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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
  2. Hotelling's rule: Pt = MECt + MUCt(1 + r)t
  3. Backstop fuel
  4. Monopoly (i.e., OPEC)

Futures Markets

  1. Changes in demand (e.g., population growth)
  2. Changes in supply (i.e., reserves, e.g., exploration and discovery)