Published on: **Mar 3, 2016**

- 1. Natural Resource EconomicsNatural Resource Economicsดร.ภูมิสิทธิ์ มหาสุวีระชัยู ุDynamic Efficiency and SustainableDynamic Efficiency and SustainableEfficiency Prevent wasteful use AllocationFairness concern Future GenerationFairness concern Future GenerationDepletable ResourceDepletable Resource Too much use by current generationToo much waste for current and future generationVery few natural resources available for nextgenerationA Two-Period ModelA Two Period ModelStatic Assumptions1. Fixed supply of a depletable resource to allocatebetween two periodbetween two period2. Demand is constant in the two period3. Marginal willingness to pay P = 8 -0.4q4. Constant marginal cost at $25 Total supply = 305. Total supply = 30
- 2. A Two-Period Model (Cont)A Two Period Model (Cont)P P8Period 18Period 22 MC 2 MC2 MC 2 MCQ15 20 Q15 20A Two-Period Model (Cont)A Two Period Model (Cont)Supply is sufficient to cover the demand in bothperiodThe consumption in period 1 does not reduce theti i i d 2consumption in period 2Static efficiency criterion is sufficient because theStatic efficiency criterion is sufficient because theallocations are not interdependentpA Two-Period Model (Cont)A Two Period Model (Cont)What happen when available supply is less than 30?Dynamic efficiency criterionMaximize the present value of the net benefitA Two-Period Model (Cont)A Two Period Model (Cont)MNB (Period 1) MNB (Period 2)6 65.45AAQ115 15Q in Period 1 Q in Period 2How to determine Q1 and Q2 that maximize the presentQQ215 15Q in Period 1 Q in Period 2How to determine Q1 and Q2 that maximize the presentvalue of the net benefit
- 3. A Two-Period Model (Cont)A Two Period Model (Cont)Dynamic efficient allocation has to satisfy thecondition thatPresent value of MNB from last unit in period 1 =Present value of MNB in periods 2Present value of MNB in periods 2MNB = MNBMNB1 = MNB2Marginal User Cost (MUC)Marginal User Cost (MUC)Scarcity Greater current use diminishes futureopportunitiesopportunities.User Cost (UC) The present value of futureUser Cost (UC) The present value of futurebenefit that is last due to use of the resource atpresent.Marginal User Cost (MUC) The user cost of onedditi l it d i th tadditional unit consumed in the present.Marginal User Cost (MUC)Marginal User Cost (MUC)6 65 45MNB1 5.45MNB1 MNB2MUC15 15UC00MNB1 = MNB2 = MUCMarginal User Cost (MUC)Marginal User Cost (MUC)Scarcity impact prices in both periodsP1 = MC + MUC 2 + 1.905P1 MC + MUC 2 + 1.905P2 = MC + MUC 2 + 1 905 (1 + 0 1)P2 = MC + MUC 2 + 1.905 (1 + 0.1)
- 4. Marginal User Cost (MUC)Marginal User Cost (MUC)Discount rate affects bothMarginal User CostAllocation of the resourceWhat would happen for the allocation of theresource if the discount rate is increased?resource if the discount rate is increased?Sustainability CriterionSustainability CriterionEarlier generations are at liberty to use resourcesthat would thereby be denied to future generations aslong as the well-being of future generations remain justlong as the well-being of future generations remain justas high as that of all previous generations.Does our dynamic allocation procedure meet theDoes our dynamic allocation procedure meet thecondition of the sustainability criterion?Sustainability Criterion (Cont)Sustainability Criterion (Cont)6 65.451.90515 15 00 10 238Period 1 Net benefit (1 905) (10 238) + 0 5 (4 095) (10 238) = 40 46615 15 00 10.2389.762Period 1 Net benefit (1.905) (10.238) + 0.5 (4.095) (10.238) 40.466Period 2 Net benefit (2.905) (9.762) + 0.5 (3.905) (9.762) = 39.512Sustainability Criterion (Cont)Sustainability Criterion (Cont)40 466 > 39 512 Violated sustainability criterion40.466 > 39.512 Violated sustainability criterionHowever, this could be solved if current generation wouldlike to share some of their benefit to the second generation.Suppose if the current generation keeps net benefit of $40 andSuppose, if the current generation keeps net benefit of $40 andsaves $0.466 for the second generation at 10% interest, thissaving would grow to 0.466 (1.1) = 0.513 The second generationwould receive net benefit = 39 512 + 0 51 = $40 025 The secondwould receive net benefit 39.512 + 0.51 $40.025. The secondgeneration would be better off by accepting the dynamicefficient allocation with sharing from the current generation.
- 5. Sustainability Criterion (Cont)Sustainability Criterion (Cont)Dynamic efficient allocations do not automaticallysatisfy sustainability criteriaThey could be used with sharing to satisfy thet i bl it isustainable criteria