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Unit 1.2 NR
graphical analysis of allocation of non-renewables
| Question | Answer |
|---|---|
| Describe the graph briefly/draw | top left quadrant: upward sloping demand curve reaching choke price K=Pt, x axis R, y net price Pt TR: Net price path Pt=P0e^(Pt), time on x-axis, NP y BL: draw line from R0 to T on y axis, total resource stock BR: 45 degree connects t on y and x |
| What do we have at optimal t | Demand=St=Rt=0, I.e we have reached choke point at top of demand curve, parallel with top of net price path at time T We have Pt=K |
| assumptions of this model | 1) well-defined property rights 2) A choke price actually exists, equal to K |
| Steps for comparative advantage | 1) look at net price path, any influence on this i,e through interest rate changes, extraction cost 2) then look at demand, any change in net price will have an inflence of the extraction rate (which demand is based upon) 3) then look at bottom right |
| cont | extraction path, do we have faster depletion? This will be influenced by t found above |
| when are perfect competitive Markets efficient | when the private market interest rate equal the social consumption discount rate |
| intuition behind this | - resource owners Consider their resource as a real asset, so if the resource price is expected to increase more than the interest rate, sell tomorrow. If interest rate increases less than expected increase, sell today - @ equilibrium, prices increase @ i |
| comparison with a monopolist market | - monopolist restricts output so prices become higher, P0 is higher, net price will then be lower than they perf competition, leading to later full extraction R0 lower as this corresponds to limiting supply earlier and a slower extraction rate |
| 4. Types of deviations from perfect competitive market conditions AND IMPACT ON EXTRACTION RATE COMPARED TO EFFICIENT RATE | non-competititve Market structures i.e monopolies and cartels (OPEC), below efficient extraction rate Difference between private and social discount rate, below or above extraction rates 3. Negative externalities from extraction or use, increase |
| cont | Poorly defined property rights, increase in extraction rates |
| Increase in interest rate - optimal path | P0 is initially below Original net price path, then crosses to reach choke price faster, faster extraction rate, initial R0 is higher |
| Unfeasible path with an increase in interest rate | Pt is always lower and for a longer time than T, more extraction than it is available |
| non optimal path | Po same, Pt is always higher, it reaches K earliest than T, therefore less extraction than it is available |
| Increase in demand | demand path shifts upwards, increase in price at all levels, net price path shifts upwards - earlier exhaustion as increase in demand results in more aggressive extraction New R0 is higher, draw to new T which is lower |
| new resource stock | Increase in supply, reduction in price, shift in net price downwards at all periods in time Later full exhaustion Demand doesn’t shift, rather we move down to higher new R0, connect with new T |
| Fall in price of a substitute | fall in choke price to Pb on demand curve Net price Curve shifts down, but new new price curve stops at Pb, earlier full exhaustion - this is where switch occurs to substitute Full exhaustion still occurs |
| Increase extraction cost | Higher p0 due to increase in costs, however maa=kes it less attractive to extract, prices fall as they cross orginal, later full exhaustion, R0 falls, less extracted, draw to new T below old T |
| Virtuous cycle through production | More production. —> improvement production process —-> learning by doing |
| Impact of tax and subsidies | we have net price pt and Pt, gross price Tax/subsidies are shown through an increase/decrease in extraction cost Wiring net price as a function of gross price minus cost we have Pt - c/1-a = (P0-c/1-a)^e(it), when a is positive (tax) c ups costs |
| cont, shown in graph | tax - increases c, increases P0, decrease in growth of Pt, increase in T Subsidy: decrease c, decrease in P0, increase in growth of Pt, decrease in t |
| critique of hotelling’s rule | HR suggest prices rise exponenetially over time at interest rate, extraction falls over time, due to discounting Not really the case when we look at oil, falling during covid 19, substantial increase after Ukraine war, non linear Prod has been increas |
| Difference of new stock discoveries on net prices compared to with NO CHANGE IN STOCKS | Non monotonic net price path with stock discoveries, rather than upward exponential net price path. Consistent with actual behaviour of oil prices |
| further problems associated with the model’s assumptions | Constant discount rate over time Private discount rate identical to the social discount rate Perfect foresight of prices at each point of tine Constant extraction over time Total finite supply - not the case with new stock discoveries |
| cont | the model assumes that there is an infinite number of infinitely small owners, in relation markets have sometimes cartels, substantial national control for exploration |
| Problems with empirical testing | net resource price is unobservable |
| another problem | hotelling’s model assumes dynamic efficiency but this does not mean it is sustainable. Hotelling’s model implies falling consumption over time but this os not sustainable by definition “non-declining consumption per capita over indefinite time” |
| indicators of resource scarcity and issues with these | - physical Indicators i.e reserve quantities (does not take into declining demand as prices increase, newly discovered reserves, recycling) Marginal resource extraction + exploration/discovery costs (measurement and reliability problems) Cont |
| cont | real market price and net price (market owned are not merely determined by economic factors and net prices are not directly observable, resource amenities are not generally traded on markets) |
Created by:
aliyah s