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This thesis uses neoclassical growth models to evaluate what effect the limited availability of nonrenewable resources has on the economy’s (world’s) growth potential. Markus Merz concludes that recycling may serve as a mid-term solution to continued growth, but technological progress is needed in the long-run. The theoretical analysis starts with the well-known Dasgupta-Heal model and considers the effect of recycling and technological progress on the resource constraints; resource-augmenting and backstop technology are analyzed. After a thorough analysis of the models it is concluded that the ultimate solution to long-term economic growth is a backstop technology.



1. Introduction

Natural resources are vital for the production of output. Economic activity is dependent on resources, i.e. land to grow food, raw materials to make goods, and energy to power machines. For example, according to the World Resource Institute (2010) about 37% of the world’s land is used for agriculture and according to BP (2014) about 91 million barrels (bbls) of oil are consumed every day. Oil plays a vital role in many aspects of daily life. Its components are used to produce almost all chemical products, such as plastic, detergent, paint, and even medicine. Its most apparent use is as a fuel for cars and airplanes. Natural resources are not created through a deliberate investment but rather exist irrespective of human activity. The opposite is true for physical and human capital.
Markus Merz

2. An Introduction to Economic Growth Theory and the Oil Market

The reliance of production and economic growth on natural resources, specifically oil, may result in a decline on economic growth due to resource constraints.
Malthus (1803) was one of the first who attempted to answer the question whether natural resources hinder or even limit economic growth. He concluded that an exponential increase in population cannot be sustained with a modest linear increase of food production. The finite agricultural production possibilities due to limited land availability would result in the starvation of the excess population. The scarce natural resource, land, leads to long-term economic stagnation. Shortly after Malthus described his theory the industrial revolution began. The industrialization helped western European countries to escape the Malthusian trap.
Markus Merz

3. The Dasgupta-Heal Model

Before introducing recycling and technological progress a simple economic growth model adapted from Dasgupta and Heal (1974) is introduced and analyzed.
Markus Merz

4. Recycling as a Source of Regeneration

The effect of recycling on resource conservation depends on the percentage of materials that economically and technically may be recycled. Recycling extends the lifetime of an economy since it increases the long-term supply of an exhaustible resources by a factor of its “recycling multiplier” as Tietenberg and Lewis (2012, p. 184) note.
Markus Merz

5. Technological Progress

While recycling can extend the life of the economy and is regarded as an intermediate solution, technological progress is needed to sustain long-term economic growth.
Markus Merz

6. Discussion and Conclusions

Today‘s society is extremely dependent on limited natural resources. The most obvious example is oil. In recent years, with the rise of the computer age, resources such as rare earth metals have begun to play an important role. As society grows more dependent little is known about their long-term effect on economic growth. This thesis presents the complex development that an economy based on limited resources will undergo.
Markus Merz


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