MEV 014: Unit 15 – Resource Economics

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 UNIT 15: RESOURCE ECONOMICS

15.0 Introduction

Resource Economics is the study of how natural resources are used, managed, and conserved through economic principles. It helps us understand how to use resources like water, forests, minerals, and fish in a way that is efficient, fair, and sustainable. Since resources are limited, Resource Economics helps in making smart choices so that the environment is protected and the economy can grow.

15.1 Objectives

After reading this unit, you will be able to:

  • Understand the meaning and importance of resource economics.
  • Learn about the supply of exhaustible and renewable resources.
  • Know the basics of optimal depletion theory.
  • Understand peak oil theory and its limitations.
  • Study the economic management of fishery, forest, and water resources.

15.2 Supply of Exhaustible Resources

Exhaustible resources are those that can run out, like coal, oil, and natural gas. These are also called non-renewable resources.

Key points:

  • These resources are formed over millions of years and cannot be replaced easily.
  • The more we use them, the less we have for the future.
  • We must manage their usage wisely to avoid shortages and environmental damage.

15.2.1 Optimal Depletion Theory: Basic Foundations

This theory helps us decide:

  • How much of a resource should be used today and
  • How much should be saved for future generations.

The main idea is to find a balance between using resources for current needs and saving them for future needs. Prices of resources, interest rates, and availability play a major role in deciding how much to use now and how much later.

Example: If oil becomes rare in the future, it will be more expensive. So, we should not finish it all now.

15.2.2 Peak Oil Analysis: Hubbert’s Logistic Model and Its Limitations

Hubbert’s Peak Oil Theory says:

  • Oil production will rise, reach a peak, and then fall.
  • The “peak” is the point when oil production is at its highest.

Hubbert predicted U.S. oil production would peak around 1970 — and it did.

Limitations of the model:

  • Does not consider new technologies that can extract more oil.
  • Ignores the discovery of new oil reserves.
  • Cannot predict economic and political factors affecting production.

Conclusion: While useful, the model cannot perfectly predict future oil production.

15.3 Economics of Renewable Resources

Renewable resources are those that can be replenished naturally—like water, forests, and fish. But even renewable resources can be overused and damaged.

15.3.1 Economics of Fishery

Fish are renewable but can be overfished.

Key economic ideas:

  • There is a Maximum Sustainable Yield (MSY)—the most fish that can be caught without reducing the fish population.
  • If too many people fish, the fish population drops, and the economic profit decreases.
  • Governments can control this using fishing licenses, time limits, and marine reserves.

Example: Overfishing in oceans has reduced fish numbers, causing economic loss.

15.3.2 Economics of Forest

Forests provide timber, oxygen, habitat, and climate control.

Economic management includes:

  • Sustainable cutting of trees (planting new ones after cutting).
  • Valuing non-market benefits, like clean air and biodiversity.
  • Incentives to local communities for protecting forests.

Problem: If trees are only cut for profit and not replanted, forests are lost permanently.

15.3.3 Economics of Water Use

Water is essential, but not always equally available.

Economics of water involves:

  • Pricing water properly to avoid wastage.
  • Ensuring fair access to all, including farmers, industries, and homes.
  • Promoting recycling and efficient use (drip irrigation, rainwater harvesting).
  • Managing demand during scarcity (droughts).

Example: Charging a small fee for water can reduce waste and fund water-saving projects.

15.4 Let Us Sum Up

  • Resource Economics is about using natural resources efficiently and sustainably.
  • Exhaustible resources like oil and coal need careful planning to avoid running out.
  • Optimal Depletion Theory helps balance current and future needs.
  • Hubbert’s model shows oil production peaks and then falls, but it has some flaws.
  • Renewable resources like fish, forests, and water also need economic planning to avoid overuse.
  • Managing these resources helps protect the environment and support economic development.

 

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