Groundwater management under heterogeneous land tenure arrangements

We develop a groundwater extraction model that considers the Marshallian inefficiency associated with sharecropping and use data from Pakistan to simulate the impact of an open access regime and of optimal management on groundwater extractions, the state of the aquifer, and annual net benefits through time. We also evaluate a price instrument as a mechanism of inducing optimal extractions. Under both open access and optimal management, we observe notable differences in groundwater extractions and the water table level between the tenure model (which considers the behavior of both owner cultivators and sharecroppers) and the baseline model (which includes the behavior of only owner cultivators). We also find a modest difference in the aggregate net benefits generated by the two models. The results offer new insights—vis-à-vis land tenure heterogeneity—into the evaluation of more effective policies for groundwater management and aquifer sustainability.     

Testing the Assumptions and Predictions of the Hotelling Model

In this paper, we empirically examine whether the assumptions and predictions of the Hotelling model are consistent with patterns observed in data. We consider nonlinear functional forms for the extraction cost and resource demand to develop an empirical Hotelling model with technological progress and stock dependent extraction costs. Using panel data on fourteen nonrenewable natural resources to estimate this empirical Hotelling model, we get qualitatively different results as compared to the related literature. We find evidence of stock-dependent extraction costs for most resources. There is no evidence against the linearity of the optimal extraction rate in the resource stock for almost all resources studied. Furthermore, the Hotelling model may sustain a zero long-run growth rate in resource prices. These results depend on whether firms use different extractive technologies or whether the structural break observed on resource prices is taken into account.     

Spatial-dynamic seawater intrusion and pumping cost externalities in a confined aquifer

This paper analytically develops the economic theory of seawater intrusion in confined aquifers and, in the process, creates generally applicable solution methods for illuminating steady-state spatial externality relationships for other spatial-dynamic diffusion resource management issues. By linking a confined aquifer and its unconfined recharge region with a dynamic boundary condition neglected in the economics literature, we introduce the physical realities that generate spatial externalities in all renewable confined aquifers. We derive spatial-dynamic first-order conditions for optimal extraction and characterize the policy relevant spatial-dynamic pumping cost and seawater intrusion cost externalities with hydrological assumptions appropriate to the different dynamic timescales of system components and the focus on seawater intrusion. For confined aquifers, we prove the marginal seawater intrusion cost externality decreases linearly in distance from the coast. Moreover, we demonstrate that the marginal seawater intrusion cost externality generally exceeds marginal pumping costs near the coast, implying substantial divergence between optimal and common property extraction near the coast, and significant divergence may extend to the inland aquifer boundary depending on both the magnitude and shape of the revenue function relative to extraction costs and aquifer parameters.     

Extracting Resource Deposits of Unknown Size: Optimal Order

Abstract. The optimal order of extracting resource deposits of unknown size depends on the informational characteristics of the extraction process. This paper fills the gap between two strands of literature. The first strand is about the optimal extraction of single reserve under stock-size uncertainty. The second strand is about the optimal order of extraction of deposits of known sizes. Our emphasis on the premium for resolution of uncertainty complements Solow and Wan's shadow surcharge when extraction moves from a low-cost deposit to a high-cost one.     

Mineral resources for renewable energy: Optimal timing of energy production

The production of energy from renewable sources is much more intensive in minerals than that from fossil resources. The scarcity of certain minerals limits the potential for substituting renewable energy for scarce fossil resources. However, minerals can be recycled, while fossil resources cannot. We develop an intertemporal model to study the dynamics of the optimal energy mix in the presence of mineral intensive renewable energy and fossil energy. We analyze energy production when both mineral and fossil resources are scarce, but minerals are recyclable. We show that the greater the recycling rate of minerals, the more the energy mix should rely on renewable energy, and the sooner should investment in renewable capacity take place. We confirm these results even in the presence of other better known factors that affect the optimal schedule of resource use: expected productivity growth in the renewable sector, imperfect substitution between the two sources of energy, convex extraction costs for mineral resources and pollution from the use of fossil resources.     

The benefits of storage and non‐renewable resource price dynamics

Abstract Both the Theory of Storage and the Hotelling model play a prominent role in the study of non‐renewable resource prices. This paper combines these approaches by modifying the Hotelling model to allow firms to hold inventory in addition to in‐ground reserves, contributing three new results. First, inventory is more likely to be held if future demand and/or the marginal cost of extraction are uncertain. Second, the market price of the commodity is based on the Theory of Storage when inventory is held. Third, the optimal extraction of the resource is based on the Hotelling model.     

Renewable resource management with stock externalities: Coastal aquifers and submarine groundwater discharge

We model coastal groundwater management and its effects on submarine groundwater discharge, nearshore marine water quality, and marine biota. Incorporating the stock externality effects on nearshore resources increases the optimal sustainable steady-state levels of both the aquifer head and the stock of a keystone native algae species. Numerical simulations are illustrated using data from the Kuki’o region on the Island of Hawaii. Two different approaches for incorporating the nearshore resource are examined. Including algae's market value in the objective function results in only slightly lower rates of groundwater extraction. When a minimum constraint is placed on the stock of the keystone species, however, greater conservation may be indicated. The constraint also results in non-monotonic paths of water extraction, head level, and marginal opportunity cost of water in the optimal solution.     

Groundwater balance and conservation under different water pricing and agricultural policy scenarios: A case study of the Hamadan-Bahar plain

Government subsidies for agricultural activities in recent decades have encouraged farmers of Hamadan-Bahar plain to extend the number of wells and irrigated farms, with no consideration of groundwater resource conservation. As a result, the level of the groundwater table has decreased continuously in this area, threatening the life of groundwater aquifer. The objective of the study is to analyze the impacts of irrigation water pricing and agricultural policy scenarios on aquifer conservation by considering the dynamic relations between aquifer groundwater balance and the agriculture sector. For this purpose a combination of simulation and optimization techniques is considered in a dynamic framework. Firstly, dynamic treatments of groundwater and the main factors affecting the balance of studied aquifer are simulated. Then, optimization behaviour of agriculture sector related to farmers' decision-making processes is defined on the time horizon. Thereafter all of the equations are used simultaneously by a non-linear dynamic programming method, which maximize present value of gross margins of agriculture sector subject to groundwater constrains and other input limitations. The analysis of the results indicates that water pricing by itself can considerably reduce the agricultural demand for aquifer groundwater in the Hamadan-Bahar plain.     

Political foundations of the resource curse

In this paper we argue that the political incentives that resource endowments generate are the key to understanding whether or not they are a curse. We show: (1) politicians tend to over-extract natural resources relative to the efficient extraction path because they discount the future too much, and (2) resource booms improve the efficiency of the extraction path. However, (3) resource booms, by raising the value of being in power and by providing politicians with more resources which they can use to influence the outcome of elections, increase resource misallocation in the rest of the economy. (4) The overall impact of resource booms on the economy depends critically on institutions since these determine the extent to which political incentives map into policy outcomes. Countries with institutions that promote accountability and state competence will tend to benefit from resource booms since these institutions ameliorate the perverse political incentives that such booms create. Countries without such institutions however may suffer from a resource curse.     

Tradeoffs between costly capacity investment and risk of regime shift

There is mounting evidence that increasing natural resource exploitation (e.g., fossil fuel extraction and consumption) could trigger irreversible dramatic ecological events like global warming. While capacity investment costs and the possibility to produce at full capacity are two factors that critically affect the exploitation rate, little is known about their effect on management. I generalize standard models of pollution control under the threat of dramatic regime shifts to investigate how optimal management changes with both factors. My analysis reveals that accounting for such factors gives rise to investment and emissions policies that challenge conventional wisdom. For instance, I find that under reasonable conditions, an exogenous threat of a doomsday event induces a cautious management strategy. Using parameters estimated from climatic data, my analysis shows that raising the discount rate can induce lower emissions, highlighting the complex interplay between the threat and both factors.     

A Stackelberg Game Model of Trade in Renewable Resources with Competitive Sellers*

We model international trade in renewable resources between a single buyer and competitive sellers as a Stackelberg differential game. The buyer uses unit and ad valorem tariffs to indirectly encourage conservation of the renewable resource under study. First, we show that the efficacy of these trade policy instruments in promoting conservation depends fundamentally on whether harvesting costs are stock dependent or independent. When harvesting costs are stock independent, the optimal open‐loop tariffs are dynamically consistent. In contrast, when harvesting costs are stock dependent, the optimal open‐loop tariffs are dynamically inconsistent. Secondly, we point out that whether the terminal value of the resource stock is higher with the stock independent or the stock dependent cost function cannot be resolved unambiguously. Thirdly, we show that it does not make sense for the buyer to use both tariffs simultaneously. Finally, we discuss the implications of these and other findings for renewable resource conservation in general.     

Exhaustible resources,technology choice and industrialization of developing countries

How should the world economy adapt to the increased demand for exhaustible resources from countries like China and India? To address that issue, this paper presents a dynamic model of the world economy with two technologies for production; a resource technology, which uses an exhaustible resource as an input and an alternative technology, which does not. I find that both the time path of resource extraction and the adoption of the alternative technology depend on the optimal allocation of capital across the technologies, and on the size of the capital stock in relation to the resource stock. In particular, if the capital stock is low, only the resource technology is used initially and the alternative technology is adopted with a delay. Next, I use the model to analyze the effects of industrialization of developing countries on the extraction of oil and technology choice for energy production. As a result of industrialization, the alternative technology for energy production is adopted earlier.     

Natural resource extraction and civil conflict

Based on evidence linking natural resources to civil conflict, this paper studies two armed groups fighting to control a resource and possibly a second prize. Labor is used in the agricultural, resource extraction and conflict sectors, and the groups also buy a capital input to conflict subject to the constraint that capital spending cannot exceed resource earnings. I find that exogenous shocks can have different effects on conflict intensity depending on whether the credit constraint binds. In particular, international policies to ban natural resource exports from conflict zones (e.g. ‘blood diamonds’), raise agricultural productivity or limit the import of weapons will limit conflict intensity if the credit constraint binds. However, if the credit constraint does not bind, then the first two policies promote conflict, and so could even the third policy. The results therefore suggest some caution in international policymaking.     

Environment,Directed Technical Change and Economic Policy

We study the effects of an economic policy in an endogenous growth general equilibrium framework where production of consumption goods requires two resource inputs: a polluting non-renewable resource and a non-polluting labour resource. The use of the former contributes to the accumulation of pollution in the atmosphere, which affects welfare. There is a specific research sector associated with each of those resources. We provide a full welfare analysis, and we describe the equilibrium paths in a decentralized economy. We go on to study the effects of three associated economic policy tools: a tax on the polluting resource, and two research subsidies. We show that the optimal environmental policy has two main effects; it delays the extraction of the resource and with it the level of polluting emissions and it reallocates research efforts, decreasing the amount put into “grey” research to the benefit of “green” research. We also show that the environmental policy is grey-biased in the short-term, and green-biased in the long-term. Finally, we compute the optimal values for these tools.      

Trade Policy and Natural Resource Use: The Case for a Quantitative Restriction

This paper presents a simple way for countries to reap the benefits of trade liberalization without exacerbating problems of overexploitation of natural resources. In the context of a Ricardo–Viner dynamic trade model, it is shown that when a binding quantitative restriction regulates extraction of a natural resource, free trade is optimal. This is true even if the quantitative restriction is not optimal. In contrast, in the presence of a suboptimal tax (including a zero tax in the special case of open access) on the use of natural resources, trade liberalization is not necessarily welfare improving.     

Wilderness: options to preserve,extract, or develop

Option-pricing is used to evaluate the sequence and timing of wilderness preservation, resource extraction, and development. Resource extraction or development results in the permanent destruction of wilderness and the loss of an amenity dividend. Resource extraction does not preclude subsequent development. If the wilderness is directly developed (without prior extraction of resources), wilderness and resource extraction options are both killed. Starting from a state of wilderness, there are two stochastically evolving barriers, one for the price of the resource, and the other for the return on development. Wilderness is preserved provided the price of the resource never catches the price barrier and the return on development never catches the return barrier.     

Sustainable Development,Renewable Resources and Technological Progress

Conflicts between optimality and sustainability are typical in the literature on sustainable development. Using the capital-resource growth model, Pezzey and Withagen (1998, Scandinavian Journal of Economics 100 (2), 513–527) have proved that if natural resources are exhaustible, the time-path of consumption is single-peaked, declining from some point in time onwards. This paper extends the model to include technical progress, resource renewability, extraction costs and population growth. The main result is that, for any constant returns to scale technology, optimal paths can be sustainable only if the social discount rate does not exceed the sum of the rates of resource regeneration and augmentation. The development of resource-saving techniques is crucial for sustaining consumption per capita in the long run, whereas capital depreciation and extraction costs are neutral with respect to this sustainability condition.     

Canada’s dependence on natural capital wealth: Was Innis wrong?

Canada has abundant natural resources—its stock of natural capital wealth. A recurring debate in the literature is whether resource rich countries benefit in the form of higher sustained growth rates or not from the export of their natural resources. Canada's Harold Innis wrote extensively on this subject over 80 years ago and argued for the “no” side in the debate. Was he was right or wrong? I begin with the foundations of natural resource theory then turn to empirical work in recent decades. I agree with the literature that Canada overall has benefited from the export of its natural resources, but question whether that can continue given the focus on short term growth and the failure to account for the social costs of resource extraction and use—the environmental externalities that degrade and reduce stocks of natural capital. These externalities increasingly threaten our water and land resources and without more effective policy, the ability of resources to sustain growth and well‐being is questionable. Was Innis wrong? Yes in that the evidence supports the counter argument—resources have helped Canada become a developed economy with relatively high incomes and sustained growth rates. Innis was right that the uneven distribution of resources causes different impacts regionally especially during booms and busts and recognized the need to find substitutes for declining and degrading resource stocks. But Innis, like many after him, focused more on the intrinsic features of natural resources than policy to address the social costs of their development, a legacy that leaves us in a precarious position today.     

Energy substitutions, climate change and carbon sinks

We determine the optimal exploitation time-paths of two energy resources, one being depletable and polluting, namely a fossil fuel, the other being renewable and clean. These optimal paths are considered along with the two following features. First, the cumulative atmospheric pollution stock is set not to exceed some critical threshold and second, the polluting emissions produced by the use of fossil fuel can be reduced at the source and stockpiled in several carbon sinks of limited capacity. We show that, if the renewable resource flow is abundant, the optimal path requires that sequestration is implemented only once the ceiling is reached. Moreover, the reservoirs should be completely filled by increasing order of their respective sequestration costs.     

Energy substitutions,climate change and carbon sinks

We determine the optimal exploitation time-paths of two energy resources, one being depletable and polluting, namely a fossil fuel, the other being renewable and clean. These optimal paths are considered along with the two following features. First, the cumulative atmospheric pollution stock is set not to exceed some critical threshold and second, the polluting emissions produced by the use of fossil fuel can be reduced at the source and stockpiled in several carbon sinks of limited capacity. We show that, if the renewable resource flow is abundant, the optimal path requires that sequestration is implemented only once the ceiling is reached. Moreover, the reservoirs should be completely filled by increasing order of their respective sequestration costs.