Resource Economics

301 Pages·2010·2.573 MB·English

by  Conrad J.M.

C
o
“Jon Conrad’s second edition of Resource Economics is an articulate, well-organized
n
presentation of key applications of intertemporal economics to problems of natural ResouRce
r
resources. More than a routine update of the first edition, it admirably balances theoreti-
cal rigor and clarity in the presentation of models, with the kinds of institutional discus- a
sions that motivate students to think about research questions.” d
– robert T. deacon, University of California, Santa Barbara
R
“This book builds on the already-excellent first edition, with its unique focus on com- economics
putational solution of dynamic optimization problems, by providing a richer and more e
detailed discussion of theoretical models of renewable, nonrenewable, and environmen-
s
tal resource management along with very helpful discussion of the intuition behind the
models and applications to resource problems.” o
– anthony Fisher, University of California, Berkeley Second edition
u
“Jon Conrad’s Resource Economics is a unique and indeed indispensable learning R
resource. It teaches students to work with sophisticated mathematical models using
c
a hands-on, intuitive approach based on the standard spreadsheet tools that are now
pervasive in quantitative analysis. Conrad’s book sets a standard to which other textbook e
authors should aspire.” – richard Howarth, Dartmouth College

e
“Jon Conrad’s second edition of Resource Economics is an elegant mathematical treat-
ment of the many complex management issues confronting natural resource managers. c
The book presents dynamic modeling and optimization in a practical context. The use of
o
Excel throughout the book gives it a concreteness that is lost in purely theoretical texts.
It is an ideal advanced text covering the economics of fisheries, forestry, nonrenewable n
resources, and stock pollutants.” – robert Mendelsohn, Yale University
o
“Resource Economics is an excellent choice for advanced undergraduates and master’s
m
students. The book’s use of Excel’s solver gives students an intuitive grasp of dynamic
optimization without relying on advanced mathematics. Students analyze fisheries, for-
i
ests, and fossil fuels as they learn spreadsheet programming skills that are valuable in other c
economics, business, and management courses.” – Martin Smith, Duke University
s
“I wish there had been a textbook such as Jon Conrad’s Resource Economics available
when I was a young student beginning to learn about natural resource and environmental
eS
economics. This is a rigorous but highly accessible mathematical introduction to the field de
that brings home to the reader the fundamental common threads, as well as the differen- ic
t
o
tiating factors, among nonrenewable, renewable, and environmental resource problems.” i
on
– robert n. Stavins, Harvard University nd

Jon M. Conrad
Cover Photo © rozdesign | dreamstime.com
Cover design by James F. Brisson
ResourceEconomics,SecondEdition
ResourceEconomicsisatextforstudentswithabackgroundincalculus
andintermediatemicroeconomicsandafamiliaritywiththespreadsheet
program Excel. The book covers basic concepts (Chapter 1); shows
how to set up spreadsheets to solve simple dynamic allocation prob-
lems (Chapter 2); and presents economic models for fisheries, forestry,
nonrenewableresources,andstockpollutants(Chapters3–6).Chapter7
examines the maximin utility criterion when the utility of a generation
dependsonconsumptionofamanufacturedgood,harvestfromarenew-
able resource, or extraction from a nonrenewable resource. Within the
text,numericalexamplesareposedandsolvedusingExcel’sSolver.Exer-
cisesareincludedattheendofeachchapter.Theseproblemshelptomake
conceptsoperational,developeconomicintuition,andserveasabridgeto
thestudyofreal-worldproblemsinresourcemanagement.
JonM.ConradisProfessorofResourceEconomicsintheDepartmentof
AppliedEconomicsandManagementatCornellUniversity.Hetaughtat
theUniversityofMassachusetts,Amherst,from1973to1977,joiningthe
Cornellfacultyin1978.Hisresearchinterestsfocusontheuseofdynamic
optimizationtechniquestomanagenaturalresourcesandenvironmental
quality. He has published articles in the Journal of Political Economy,
the Quarterly Journal of Economics, the American Journal of Agricul-
turalEconomics,theCanadianJournalofEconomics,LandEconomics,
MarineResourceEconomics,Biomathematics,EcologicalEconomics,Nat-
uralResourceModeling,andtheJournalofEnvironmentalEconomicsand
Management,whereheservedasanAssociateEditor.Heiscoauthor,with
ColinClark,ofthetextNaturalResourceEconomics:NotesandProblems
(CambridgeUniversityPress,1987)andispastPresidentoftheResource
ModelingAssociation.CambridgepublishedthefirsteditionofResource
Economicsin1999.

Resource Economics
SecondEdition
JON M. CONRAD
CornellUniversity
cambridge university press
Cambridge,NewYork,Melbourne,Madrid,CapeTown,Singapore,
SãoPaulo,Delhi,Dubai,Tokyo,MexicoCity
CambridgeUniversityPress
32AvenueoftheAmericas,NewYork,NY10013-2473,USA
www.cambridge.org
Informationonthistitle:www.cambridge.org/9780521697675
©JonM.Conrad1999,2010
Thispublicationisincopyright.Subjecttostatutoryexception
andtotheprovisionsofrelevantcollectivelicensingagreements,
noreproductionofanypartmaytakeplacewithoutthewritten
permissionofCambridgeUniversityPress.
Firstpublished1999
Secondedition2010
PrintedintheUnitedStatesofAmerica
AcatalogrecordforthispublicationisavailablefromtheBritishLibrary.
LibraryofCongressCataloginginPublicationdata
Conrad,JonM.
Resourceeconomics/JonM.Conrad.–2nded.
p. cm.
Includesbibliographicalreferencesandindex.
ISBN978-0-521-87495-3–ISBN978-0-521-69767-5(pbk.)
1. Naturalresources–Management–Mathematicalmodels.
2. Resourceallocation–Mathematicalmodels. I. Title.
HC59.15.C6562010
333.7–dc22 2010014626
ISBN978-0-521-87495-3Hardback
ISBN978-0-521-69767-5Paperback
CambridgeUniversityPresshasnoresponsibilityforthepersistenceor
accuracyofURLsforexternalorthird-partyInternetWebsitesreferredtoin
thispublicationanddoesnotguaranteethatanycontentonsuchWebsitesis,
orwillremain,accurateorappropriate.
The first edition of this text was dedicated to my wife, Janice,
and our sons, Andrew and Benjamin (a.k.a. Benj). This second
editionisdedicatedtoourgrandchildren,GradyandMcKenna.

Contents
PrefacetotheSecondEdition:WhatStayed,WhatWent,
What’sNew? pagexi
Acknowledgments xiii
1 BasicConcepts 1
1.0 Renewable,Nonrenewable,andEnvironmental
Resources 1
1.1 PopulationDynamics:Simulation,SteadyState,and
LocalStability 5
1.2 ExtractionofaNonrenewableResource 10
1.3 Discounting 11
1.4 ADiscrete-TimeExtensionoftheMethodof
LagrangeMultipliers 17
1.5 AsymptoticDepletionofaNonrenewableResource 25
1.6 TheMaximumPrincipleandDynamicProgramming
inDiscreteTime 26
1.7 DynamicProgramminginaTwo-Period,
Two-StateModel 30
1.8 AMarkovDecisionModelandStochasticDynamic
Programming 32
1.9 Exercises 34
2 SolvingNumericalAllocationProblemsUsing
Excel’sSolver 41
2.0 IntroductionandOverview 41
vii
viii Contents
2.1 OptimalRotationforanEven-AgedForest 42
2.2 SolvinganImplicitEquationfortheOptimal
Steady-StateFishStock 45
2.3 SolvinganImplicitEquationfortheOptimalDate
ofExhaustion 47
2.4 OptimalFirst-PeriodHarvestinaTwo-Period,
Two-StateModel 47
2.5 TheOptimalLinearHarvestPolicy 50
2.6 OptimalEscapementinaFinite-Horizon
DeterministicModel 52
2.7 OptimalEscapementforOneRealization
(Seed1)ofZt+1 53
2.8 AnOptimalDepletionProblem:TheMine
Manager’sProblem 55
2.9 ApproximatingtheAsymptoticApproachtoa
BioeconomicOptimum 58
2.10 TheMostRapidApproachPathtoanOptimal
PollutionStock 63
2.11 OptimalEscapementwithStochasticGrowth 67
2.12 Exercises 69
3 TheEconomicsofFisheries 75
3.0 IntroductionandOverview 75
3.1 NetGrowth 76
3.2 FisheryProductionFunctions 79
3.3 TheYield-EffortFunction 82
3.4 TheStaticModelofOpenAccess 84
3.5 TheDynamicModelofOpenAccess 85
3.6 RegulatedOpenAccess 90
3.7 MaximizationofStaticRent 95
3.8 Present-ValueMaximization 97
3.9 TraditionalManagementPolicies 102
3.10 BioeconomicorIncentive-BasedManagement
Policies 105
3.11 MarineReserves 120
3.12 Exercises 126
Contents ix
4 TheEconomicsofForestry 132
4.0 IntroductionandOverview 132
4.1 TheVolumeFunctionandMeanAnnualIncrement 133
4.2 TheOptimalSingleRotation 135
4.3 TheFaustmannRotation 136
4.4 AnExample 139
4.5 TimberSupply 143
4.6 TheOptimalStockofOld-GrowthForest 146
4.7 Exercises 149
5 TheEconomicsofNonrenewableResources 153
5.0 IntroductionandOverview 153
5.1 ASimpleModel 154
5.2 Hotelling’sRule 156
5.3 TheInverseDemandCurve 157
5.4 ExtractionandPricePathsintheCompetitive
Industry 159
5.5 ExtractionandPricePathsunderMonopoly 164
5.6 Reserve-DependentCosts 167
5.7 Exploration 171
5.8 TheEconomicMeasureofScarcity 176
5.9 APostscriptto“BettingthePlanet” 195
5.10 Exercises 196
6 StockPollutants 200
6.0 IntroductionandOverview 200
6.1 TheCommodity-ResidualTransformationFrontier 202
6.2 DamageFunctionsandWelfare 204
6.3 ADegradableStockPollutant 207
6.4 DiffusionandaNondegradableStockPollutant 212
6.5 OptimalExtractionwithaNondegradableWaste 220
6.6 ClimateChange 223
6.7 EmissionTaxesandMarketablePollutionPermits 229
6.8 Exercises 238