Table of Contents
Preface xv
Acknowledgments xix
1 Resource Economics in the Anthropocene 1
2 Preliminaries 11
2.1 Arbitrage 12
2.2 Comparative Statics 14
2.3 Elasticities 15
2.4 Competition and Monopoly 17
2.5 Examples: Competition and Monopoly* 21
2.6 Discounting 23
2.7 Applications of Discounting 26
2.8 Welfare 29
2.9 Summary 31
2.10 Terms and Concepts, Study Questions, Exercises, and Sources 32
3 Nonrenewable Resources 37
3.1 Competitive Equilibrium 37
3.2 Monopoly 41
3.3 Comparative Statics 44
3.4 Summary 44
3.5 Terms and Concepts, Study Questions, Exercises, and Sources 45
4 Additional Tools 47
4.1 A More General Cost Function 48
4.2 The Perturbation Method 50
4.2.1 It Is Optimal to Use All of the Resource 51
4.2.2 It Is Optimal to Leave Some of the Resource Behind 54
4.3 Rent 55
4.4 Solving for the Equilibrium 58
4.5 Examples* 58
4.6 Summary 64
4.7 Terms and Concepts, Study Questions, Exercises, and Sources 64
5 The Hotelling Model 69
5.1 The Euler Equation (Hotelling Rule.) 70
5.2 Rent and Hotelling 71
5.3 Shadow Prices 74
5.4 The Order of Extraction of Deposits 75
5.5 Resources and Asset Prices 76
5.6 Completing the Solution 78
5.7 Monopoly 82
5.8 Summary 83
5.9 Terms and Concepts, Study Questions, Exercises, and Sources 84
6 Empirics and the Hotelling Model 87
6.1 Models and Empirics in Economics 88
6.2 Hotelling and Prices 89
6.3 Nonconstant Costs 90
6.4 Testing Extensions of the Model 92
6.5 Summary 99
6.6 Terms and Concepts, Study Questions, Exercises, and Sources 100
7 Backstop Technology 103
7.1 The Backstop Model 104
7.2 A Two-Period Example 105
7.3 The T-period Problem 107
7.4 More General Cost Functions 110
7.4.1 Costs Depend on Extraction but Not on Stock 110
7.4.2 Stock-Dependent Costs 111
7.5 Summary 113
7.6 Terms and Concepts, Study Questions, Exercises, and Sources 113
8 The Green Paradox 117
8.1 The Approach 118
8.2 Cumulative Extraction and the Extraction Profile 120
8.3 Why Does the Extraction Profile Matter? 121
8.4 Discussion of the Paradox 124
8.5 Summary 127
8.6 Terms and Concepts, Study Questions, Exercises, and Sources 128
9 Policy in a Second-Best World 131
9.1 Welfare and Second-Best Policies 133
9.2 Monopoly + Pollution 134
9.3 Distortionary Taxes 137
9.4 Output and Input Subsidies 139
9.5 Policy Complements 143
9.6 Politics and Lobbying 146
9.7 Summary 148
9.8 Terms and Concepts, Study Questions, Exercises, and Sources 149
10 Taxes: An Introduction 153
10.1 Tax Incidence and Equivalence 154
10.2 A Graphical and Algebraic Perspective 156
10.3 Tax Incidence and Deadweight Loss 157
10.4 A Closer Look at Welfare 160
10.5 Taxes and Cap and Trade 163
10.6 Summary 167
10.7 Terms and Concepts, Study Questions, Exercises, and Sources 168
11 Taxes: Nonrenewable Resources 171
11.1 Current Fossil Fuel Policies 172
11.2 The Logic of Resource Taxes 174
11.3 Investment 176
11.4 An Example 178
11.4.1 The Price Trajectories 179
11.4.2 Tax Incidence 180
11.4.3 Welfare Changes 181
11.4.4 Anticipated versus Unanticipated Taxes 183
11.5 Summary 185
11.6 Terms and Concepts, Study Questions, Exercises, and Sources 186
12 Property Rights and Regulation 189
12.1 Overview of Property Rights 190
12.2 The Coase Theorem 193
12.3 Fisheries: The Basics 195
12.4 A Model of Overcapitalization* 197
12.5 Property Rights-Based Regulation 200
12.5.1 Reducing Industry Costs 200
12.5.2 Increasing Revenue 204
12.5.3 Protecting Fish Stocks 205
12.6 Subsidies to Fisheries 210
12.7 Summary 212
12.8 Terms and Concepts, Study Questions, Exercises, and Sources 212
13 Renewable Resources: Tools 217
13.1 Growth Dynamics 218
13.2 Harvest and Steady States 219
13.3 Stability 221
13.3.1 Discrete versus Continuous Time 221
13.3.2 Stability in Continuous Time 222
13.3.3 Stability in the Fishing Model 224
13.4 Maximum Sustainable Yield 226
13.5 Summary 227
13.6 Terms and Concepts, Study Questions, Exercises, and Sources 227
14 The Open Access Fishery 229
14.1 Harvest Rules 231
14.1.1 Stock-Independent Costs 231
14.1.2 Stock-Dependent Costs 231
14.2 Policy Application 234
14.3 Summary 237
14.4 Terms and Concepts, Study Questions, Exercises, and Sources 238
15 The Sole-Owner Fishery 241
15.1 The Euler Equation for the Sole Owner 242
15.1.1 Intuition for the Euler Equation 243
15.1.2 Rent 244
15.2 Policy 246
15.2.1 Optimal Policy under a Single Market Failure 247
15.2.2 Optimal Policy under Two Market Failures 247
15.2.3 Empirical Challenges 248
15.3 The Steady State 249
15.3.1 Harvest Costs Are Independent of Stock 250
15.3.2 Harvest Costs Depend on the Stock 253
15.3.3 Empirical Evidence 257
15.4 Summary 257
15.5 Terms and Concepts, Study Questions, Exercises, and Sources 258
16 Dynamic Analysis 261
16.1 The Continuous Time Limit 262
16.2 Harvest Rules for Stock-Independent Costs 263
16.2.1 Tax Policy Implications of Tables 16.1 and 16.2 265
16.2.2 Confirming Table 16.2* 266
16.3 Harvest Rules for Stock-Dependent Costs 268
16.3.1 Tax Policy 268
16.3.2 The Phase Portrait* 270
16.4 Summary 273
16.5 Terms and Concepts, Study Questions, Exercises, and Sources 274
Water Economics 275
17.1 The Policy Context 277
17.2 A Static Market Failure 281
17.3 The Rebound Effect 286
17.4 A Dynamic Market Failure 289
17.4.1 The Ogallala Aquifer 289
17.4.2 Stock Externalities for Groundwater 290
17.4.3 A Dynamic Model of Water Economics 292
17.5 Trade under Weak Property Rights 296
17.6 Summary 298
17.7 Terms and Concepts, Study Questions, Exercises, and Sources 299
18 Sustainability 305
18.1 Measuring Resource Value or Price 306
18.2 Weak and Strong Sustainability 309
18.2.1 Generalizations and Empirics 312
18.3 Welfare Measures 314
18.4 Summary 318
18.5 Terms and Concepts, Study Questions, Exercises, and Sources 319
19 Valuing the Future: Discounting 321
19.1 The Social Cost of Carbon 323
19.2 Discounting Utility or Consumption 324
19.2.1 The Tyranny of Discounting 325
19.2.2 Uncertain Timing 327
19.3 The Consumption Discount Rate 329
19.3.1 The Ramsey Formula 329
19.3.2 The Importance of the Growth Trajectory 331
19.3.3 Growth Uncertainty 332
19.4 Hyperbolic Discounting 335
19.4.1 Transfers Affecting a Single Person or Generation 336
19.4.2 Transfers across Generations 337
19.4.3 Individual versus Generational Discounting 339
19.4.4 The Policy Relevance of Hyperbolic Discounting 339
19.5 Summary 340
19.6 Terms and Concepts, Study Questions, Exercises, and Sources 341
Appendix A Math Review 345
A.1 Derivatives and Graphs 345
A.2 Derivatives of Exponents 346
A.3 The Sum, Product, and Quotient Rules 347
A.4 The Chain Rule 347
A.5 Partial Derivatives 348
A.6 Total Derivatives 349
A.7 Constrained Optimization 349
A.8 First and Second Order Effects 350
A.9 First Order Approximations 350
Appendix B The Hotelling Model 353
B.1 Derivation of the Hotelling Equation 353
B.2 Completing the Solution 354
B.3 Inductive Proofs 357
Appendix C Algebra of Taxes 359
C.1 The Open Economy 359
C.2 Algebraic Verification of Tax Equivalence 361
C.3 Approximating Tax Incidence 361
C.4 Approximating Deadweight Loss 363
C.5 Cap and Trade 364
Appendix D Continuous Time 367
Appendix E Bioeconomic Equilibrium 369
Appendix F The Euler Equation for the Sole-Owner Fishery 373
Appendix G Dynamics of the Sole-Owner Fishery 375
G.l Derivation of Equation 16.2 375
G.2 Differential Equation for Harvest 376
G.3 Finding the Full Solution 378
Appendix H The Common-Property Water Game 379
Appendix I Sustainability 381
I.1 Derivation of Equation 18.2 381
I.2 Confirming the Hartwick Rule 382
I.3 Feasibility of Constant Consumption 382
I.4 Derivation of Equation 18.6 384
Appendix J Discounting 385
J.1 The Ramsey Formula 385
J.2 Optimism versus Pessimism about Growth 386
References 389
Index 399
