Intertemporal Resource Economics

Conventional belief holds that the ever globalizing market economy is running out of natural resources, and hence is doomed to fail in the foreseeable future (see Meadows et al, 1972, 1992, for a system–dynamic foundation of the conventional belief). Long–run resource statistics however show exactly the opposite trend: natural resource scarcity as measured by real unit extraction costs of almost all fossil and mineral resources is decreasing (see the classic study by Barnett and Morse, 1963). Although more recent empirical studies of real resource prices (see Slade, 1982; Hamilton, 2008; Ghoshray and Johnson, 2010) have also detected rising prices for some natural resources, the empirical evidence on increasing resource scarcity remains mixed (Endres and Querner, 2000, 18). The question thus arises whether natural resource scarcity is an imaginary or a real problem in economics. We will address this major question in the present book by dividing it into subquestions and respective brief answers to provide an intellectual roadmap to the reader of this book.

From the previous chapter we know that natural resources can be distinguished in terms of whether they are renewable or not, whether they are used as consumption good or as input to production, whether private property rights are defined or not, and whether they can be reused or not. Depending on these various characteristics, natural resources might either promote or limit economic growth. For instance, new renewable sources of energy might become available and thus enhance growth potential, e.g. based on solar radiation, or sources of non-renewable resources might be used up and thus restrain growth. The purpose of this chapter is to clarify the different stances towards the compatibility or incompatibility of natural resource use difand economic growth.

Based on the three statements presented in Chap. 2, i.e. (i) exhaustible resources are not scarce, (ii) fossil resources are unnecessary or inessential, and (iii) backstop technology is available, it may appear that the definition and characterization of both intergenerational efficiency and intertemporal market equilibrium are no longer a problem. Unfortunately, this is not in fact the case. Even when both exhaustible and renewable resources are economically abundant, and may therefore be excluded from our modeling framework, an intertemporal market equilibrium may still remain intergenerationally inefficient. We intend to show how such a position may come about in the following pages. By way of illustration we use the most simple version of the Diamond–type (Diamond, 1965) overlapping generations economy with log-linear intertemporal utility and Cobb-Douglas (CD) production function.

The main finding of Chap. 3 was that short-run intergenerational efficiency reduces basically to intertemporal efficiency, or in other words, the specific demographic assumptions of overlapping generations do not generate results essentially different from those of infinitely lived agent models described in the seminal Ramsey (1928) model.

In the previous chapter we explored a competitive market economy with overlapping generations along an intertemporal equilibrium path. So far we have not been able to ascertain whether a market equilibrium with time–stationary per–efficiency capital intensities (i.e. a non–trivial steady state) does in fact exist, and if it exists, whether it is dynamically stable. These seminal questions will be investigated in the next section. Then we will define long-run intergenerational efficiency in our log-linear CD OLG economy, and provide a characterization of this efficiency notion. In the subsequent section the major question of this chapter will be explored, namely whether the steady state market equilibrium is long-run intergenerationally efficient. Moreover, the notion of intergenerational optimality will be introduced and compared to intergenerational efficiency. Finally, the role of resource augmenting technological progress for steady state economic growth is elaborated upon. As in Chaps. 3 and 4 we continue to assume here that both exhaustible and renewable natural resources are abundant and hence need not be considered in our model.

The attentive reader has probably been somewhat surprised that in a book about resource economics so many chapters have been devoted to the analysis of economic growth with abundant natural resources. However, we will see in the present chapter that economic growth under conditions of utilization of scarce natural resources can in fact be regarded as merely a more complex application of intertemporal allocation and growth theory than that found in standard allocation and growth theory. To avoid premature complication, we first focus in the following chapters on renewable natural resources and leave the problem of economic growth with non-renewable resources in a general equilibrium context to Chap. 8.

It is widely held that self–interest under the pressure of market competition leads individuals to overexploit and even exhaust renewable resources world-wide. We know however from Chap. 1 that the empirical evidence, at least for non–renewable resources, is much more mixed, i.e. does not generally support this claim. It is the main objective of this chapter to show that theoretical considerations also suggest that we need to exercise considerable caution and judgement when making claims of this sort. Indeed, it would appear that theoretical support is only forthcoming here when no suitable property right regime exists for the renewable resource. Hence, the empirically observed misuse of natural resources is not per se the result of individual self interest and market competition. On the other hand, for many renewable resources it is often hard in practice to define and implement property rights capable of preventing self–interested individuals, acting under conditions of market competition, from overusing renewable resources.

Until now we have focused on intergenerational efficiency as benchmark for the social evaluation of market allocation. As mentioned in the first chapter, since the 1970s the focus of resource policy turned from intergenerational efficiency to intergenerational equity, i.e. sustainability from an economic point of view. After the first oil price shock, the sustainability of economic growth (income per capita) under exhaustible (or non-renewable) became the main matter of concern. Regarding the feasibility of sustainability, we know from Chap. 2 that a constant standard of living is possible in the presence of exhaustible resources, even in the absence of technological change, provided that man-made capital and exhaustible resources are ‘good’ substitutes in production, and that resource owners invest sufficiently in reproducible capital so as to offset the optimally declining stock of natural resources and to achieve economic sustainability. However, this condition, known as the Hartwick (1977) rule, is derived from intertemporal equilibrium models of the infinitely-lived agent (ILA) type which ignore ‘generation overlap and treat society in each period as a single generation which cares about (and also discounts) the welfare of its immediate descendants and which has complete control over the rate of resource use and the saving rate’ (Mourmouras, 1991, 585).

While after the first oil price shock the sustainability of economic growth under exhaustible resources was the main matter of concern, the Brundtland report (WCED, 1987) brought the problem of the sustainability of renewable resources to the attention of the world community. Given the prominence of the sustainability criterion for renewable resources, it is surprising that so little has been done to investigate the question of whether an unhampered, competitive market economy which utilizes a renewable resource both as productive input and as an asset is at all capable of generating intertemporal equilibrium paths with either an egalitarian distribution of utilities (consumption) of subsequent generations or an egalitarian distribution of resource stocks across generations (ecological sustainability).

In Chaps. 8 and 9 we implicitly assumed that resource harvest does not, unlike commodity production, require inputs such as labor or capital. This is, however, an unrealistic simplification and this is why resource harvest costs are commonly found in sectoral models (for an overview, see Clark, 1990; Neher, 1990; Brown, 2000). In these models, harvest costs typically depend not only on the harvest volume as in Chaps. 6 and 7 but also on the resource stock. Applied to fisheries, harvest costs depend on the size of catch (Heaps and Neher, 1979) and on the available fish stock, following the generalwisdom ‘the more fish the easier to catch’ (Smith, 1968; Tahvonen and Kuuluvainen, 2000). The model of this chapter incorporates therefore harvest costs which depend inversely on the resource stock. Since ‘most fisheries in the world do not pay a wage rate but pay a share of the catch’ (Brown, 2000, 881), we assume moreover that harvest costs are accountable in resource units and thus affect the size of the stock. Both the assumptions of stock dependent harvest costs and of physical accountability are a clear difference to the harvest cost function employed in Chaps. 6 and 7.

Until now we did not consider changes in the basic parameters of our log-linear CD OLG model with a renewable natural resource. Parameter shocks both to the economic system and shifts in the natural resource influence the dynamics of the market system. In this chapter, we investigate two forms of such shocks: shocks to the regeneration ability of natural resources and a push in harvest costs. Potential sources of the former shocks are flooding, landslide or windthrow, infectious diseases or invasive species that displace native ones. Both economic factors (technological change, opportunity costs of harvesting etc.) and natural ones (remoteness, weather and climatic conditions etc.) can cause a push in harvest costs. We want to investigate the economic impacts of these two different types of resource shocks in the steady state and during the transition phase.