Session 2 Natural Resource Economics
a) Fossil fuel. Describe the key characteristics of world supply of fossil fuel. You should answer questions like; How large are known and expected reserves of the different types of fossil fuel relative to current and future consumption? In current prices, approximately how large is the value of these stocks? How large is the share of world energy production that comes from fossil fuel? How costly is extraction now and in the future? How geographically concentrated are reserves? Discuss the “peak oil” controversy?
Some possibly useful reading:
BP Statistical Review of World Economy
An assessment of World Hydrocarbon Resources (Rogner -97)
World Energy Outlook 2010 Executive Summary
b) The
production function The
central feature of the neoclassical framework is the production
function. With only capital and labor as inputs, the dominant
functional form used has typically been a Cobb-Douglas
(unitary-elasticity) formulation. When fossil energy is added as an
input into the aggregate production function, however, one also has
to take a stand on how the three arguments should be nested. One
possibility is that the production function is Cobb-Douglas in all
three arguments, i.e., F(A,K,L,E)=AK α
L1-α-Eθ
with α<1 and θ<1.
This formulation is for instance used by Nordhaus in the
RICE-model.
Describe the main implications of the above
Cobb-Douglas function. Describe also how data can be used to evaluate
whether the Cobb-Douglas function has empirical support. Suggest
alternative functional forms for the production function. Why is the
production function important when it comes to welfare analysis of
climate change?
Some possibly useful reading:
Griffin,
James M. and Paul R. Gregory. "An intercountry translog model of
energy substitution responses." American Economic Review, 1976,
Vol. 66 No.5: pp.845-857.
Hudson, Edward A. and Dale W. Jorgenson
(1974). "U.S. energy policy and economic growth, 1975-2000."
Bell Journal of Economics, 1974, Vol. 5: pp. 461-514.
Hassler,
Krusell, Olofsson,"Energy-Saving Technical Change", mimeo
IIES
c)
The
equilibrium price path for a natural resource in finite supply? What
is the Hotelling formula, which Hotelling provided as an answer to
this question, and how does one derive it? Specify the assumptions,
and try to find as general a case as possible for stating and
deriving it. What is the "Hotelling rent" earned on a
resource?
It is useful to concretize by looking at a specific
model (though the insights behind the Hotelling formula are quite
general). Suppose, for example, that you are looking at a one-sector
growth model where an aggregate production function specifies the
resource as an input (the obvious example here is that fossil fuel,
because it can be used to produce energy, which is used in production
of most goods and services). Suppose also that there is some
technology for extracting the resource---though an important special
case that you need to discuss is the case where the resource
extraction cost is zero at all times (a "cake-eating"
problem). How would you then calculate the equilibrium price path for
the resource? The Hotelling formula specifies an equation that
relates the price of the resource in t to that in t+1. The Hotelling
rent is the value of the total remaining resource at t.
Some possibly useful reading:
Hotelling, Harold. “The economics of exhaustible resources.“, Journal of Political Economy, 1931, Vol. 39, : pp. 137-175.
Solow, Robert M. “Intergenerational Equity and Exhaustible Resources“, The Review of Economic Studies, 1974, Vol. 41: pp. 29-45.
Stiglitz, Joseph. “Growth with Exhaustible Natural Resources: Efficient and Optimal Growth Paths“, The Review of Economic Studies, 1974, Vol. 41: pp. 123-137.