Renewable & Non-Renewable Resource Economics

5
UNIT 1
ECONOMIC THEORIES OF
RENEWABLE AND NON-
RENEWABLE RESOURCES
Structure
1.0
Introduction
1.1
Objectives
1.2
Economics Theories of Renewable Resources
1.3
Economics of Fishery : Bio-economic Model
1.4
Regulation of Fishery
1.5
Limitations of Steady-State Bio-economic Model
1.6
Economic Theories of Non-renewable Resources
1.7
Optimal Allocation of Non-renewable Resources
1.8
Non-renewable Resources and Limits to Economic Growth
1.9
Let Us Sum Up
1.10
Key Words
1.11
References and Suggested Further Readings
1.12
Key to Check Your Progress
1.0
INTRODUCTION
The different kinds of resources and their characteristics are discussed in detail
in resource taxonomy in previous courses. Broadly, natural resources can be
grouped into following four categories (Kerr and Swarup, 1997):
a)
Basic natural resources such as land, water and air
b)
Natural resource commodities such as timber and fish
c)
Environmental amenities such as clean air and scenic views
d)
Environmental processes suchaspollution, soilerosion,groundwaterrecharge,
and species regeneration
With reference to time, the resources can be classified into two major categories
i.e., renewable and non-renewable resources. The renewable or non-renewable
resources could either be stock or flow (Table 1.1). Renewable resources are
those resources that are capable of regenerating themselves, either naturallyor by
human activity within a relatively short period of time. Examples of renewable
natural resources include forests, wildlife, groundwater, fish, etc. In fact, the
regeneration capability depends on the resource systems. The pace of natural
regeneration is higher with resources undisturbed or least disturbed by human
beings and the highly degraded resource systems is less likely to regenerate
without some of other form of assistance. Renewable resources also include flow

6
ResourceandEconomy
resources like wind, sunlight, water streams and so on. Non-renewable resources
are defined as those which are not replaceable, or replace so slowly by natural
or artificial processes that for all practical purposes, once used theywould not be
available again within anyreasonable time frame. Obvious examples are oil and
mineral deposits.
Table 1.1: Classification of Resources with examples
Stock
Flow
Non-renewable
Coal, oil, iron, copper,
Wind, flowing river water
other metals, old-growth
timber, soils
Renewable
Water stored in tanks,
Young-growth timber,
solar energy stored in
annual crop
cells
Source:
Kerr and Swarup, 1997
Economics is the science of allocation of scarce resources and concerned with
allocation strategies with optimal outcome. Economists define these renewable
and non-renewable resources based on their supply provision characteristics.
Non-renewable resources are characterized with a fixed stock and are limited in
supplycompared to demand for them. Renewable resources though have a fixed
stock at any point of time is expected to be replaced by new stock with use of
the specific resource bynatural processes. Economists often categorize a specific
naturalresource both renewable and non-renewable based on its flow. For example
old trees with life span of as much as 500 years while renewable by the common
definition, maybe classified as non-renewable byeconomists scholars due to their
slow growth to maturity. They maybe ecologically unique and not reproducible.
In a similar way, while coal would be considered non-renewablebysome scholars
most of the resource economics scholars would consider it renewable due to the
huge stock. It is estimated that there is enough coal to last more than thousand
years. From economics point of view, there is no immediate coal scarcity in the
near future due to its huge stock and hence for economists it seems renewable.
In fact, there is no scarcity rent associated with its extraction.
The basic economic theories of renewable resources would be discussed in detail
in the following sections. The major economic issues pertaining to the studyof
non-renewable resources have involved forecasting the future price and production
paths as well as the timeline for the possible resource exhaustion.
1.1
OBJECTIVES
After reading this unit, you will be able to:
l
explain the basic concept of renewable and non-renewable resources;
l
describe the economic theories of renewable and non-renewable resources;
and
l
analyze the relationship between non-renewable resources and limits to
economic growth.

7
1.2
ECONOMIC THEORIES OF RENEWABLE
RESOURCES
As discussed in previous section, the basic economic theories of renewable
resources based on the notion that these resources are capable of regenerating
themselves within a relativelyshort period of time provided natural environment
in which they are residing and growing is not disturbed. It is observed that
biological resources such as fish and wild lifepopulations are renewable resources
because as living creatures, these resources has a birth, growth and death cycle
through natural processes of systematic reproduction, ageing and so on. These
processes involve verycomplex interactions, interdependence, interrelationships
between livingand non livingmatters includinghuman being. Now the question is
how to achieve sustainable management of renewable resources which are under
tremendous pressure from various sources including human intervention. The
management of biological resources indicates that the use of these resources for
human ends should be on a sustainable basis. First of all, sustainable management
of these resources require the information on the nature of the reproduction and
growth of the biological resources in question. It is verydifficult to obtain this kind
of information due to fact that there are so many unknowns in the biology and
ecology of the resource populations under study. However, some models have
been developed by the scholars to look into the studyof assessing and projecting
the growth of the ecological and biological resources for harvesting strategy. In
most of the models, certain variables are used for criticallyassessing allowable
sizeofbiologicalresourcesforharvest. Thesevariablesincludethe initialpopulation
size, the age and sex mix, the spatial and temporal distribution of the resource and
the natural mortality rate.
Models with a specification of this type assume a vital place in theempirical work
and management practices of fisheryand wild life in general.
Now let’s build a model by using some features of particular biomass.
Let’
s
consider B
t
is the population or the biomass of a biological resource
measured in some standard unit at a point in time t. t is the time interval, generally
a short period of time measured in months or years. B
(
t
+
t
)
is the biomass after
time interval t
has elapsed. B
t
is a stock concept as it represents the population
or biomass at a point of time. This stock is however composed of population of
a biological species comprising of different sex, age, size and shape, and weight.
B
(
t
+
t
)
is a flow concept since it indicates a change in the stock of the biomass
over specified interval of time
t. The change in the stock could result from a
combination of biological and ecological and socioeconomic factors such as
natura
l
reproduction through birth,growthofthebiomassof theexistingpopulation,
natural death, and prey-predator relationships, where the predators include
huma
n
being. Byusing the common features of biological resources, a following
relationship can be made.
B
(
t
+
t
)
= B
t
+ g (B
t
,
)
t (1)
Where, g (B
t
) is a function representing the natural growth of the population
biomass per unit of time. It is to be noted that this natural growth function is
assumed to depend on the size of the initial population size, B
t
. The variable
represents other related factors like age distribution, sex composition, other unique
biological traits of the resource, and other environmental factors that affects the
rates of growth of population biomass. The expression g (B
t
,
)
t on the right
Economic Theories of
Renewable and Non-
Renewable Resources

8
ResourceandEconomy
side of the equation (1) indicates the total increase in biomass during the time
interval [t, (t+
t)].
If we assume to be exogenouslydetermined variable and capable of being treated
as a constant parameter, then the increment in the biomass of the initial population,
B
t
during the time interval [t, (t +
t)], can be expressed as:
[ B
(
t
+
t)
- B
t
] =
B
t
= g (B
t
,
)
t (2)
Or, if we divide both sides of the equation (2) by
t, the growth of the stock
per unit time would be given by
B
t
/
t = g (B
t
) (3)
Above equation states that under normal condition the growth of the biological
resource per unit time depends primarilyon the size of the initial population. It is
to be considered here that this growth in biomass is net of natural mortalitysince
this factor is already accounted by the variable. Thus the growth function g(B
t
)
represents a net addition to the natural size of the underlying population per unit
time. In fact, it states the natural growth function of the biological resource under
study. It is fact that the stock B, grows over time suggests that the size of stock
is a function of time. If this dynamic feature of biological resources is to be
captured, then the growth function needs to be specified as g [B
(t
)
] otherwise
equation (3) is static model which denotes the growth of stock per unit time .
It doesn’t account the dynamic change in the stock over time.
Example: The above model represented by equation (3) can be understood by
citinga simple hypothetical example. Suppose country‘X’ claims thatit has a tiger
population of 3 million. Based on thepast experience, the Ministryof Environment
and Forest forthe above mentioned country claims that, on average, the population
growth (net of natural predators) of the tiger population has been about 100,000
biannually. Given these estimates of the initial population size and the rate of
biannual recruitment, what is annual growth of the tiger population for country
‘X’?
From the above information B
0
, the estimate of the initial (i.e. when t =0) tiger
population is 3,000,000; when t is 2 years, the tiger population after the initial
period is B
0+2
= B
2
= 3,100,000. This figure is estimated after accounting the
natural mortality. By using the given information, annual growth of the tiger
population can be computed using the equation (3).
That is:
g (B
t
) =
B
t
/
t = [ B
(0+2)
- B
t
]
/
t = 100,000/2= 50,000 tiger.
.
What is the use of this calculation? By using the annual growth figure, we can
chalk out the future course of actions for conserving the endangered species i.e.
tiger.
1.3
ECONOMICS OF FISHERY :
BIO-ECONOMIC MODEL
The natural growth rate of a renewable resource says, for each population size,
the maximum amount thatcan be harvested on a sustainable basis without affecting
the underlying populationsize.As such, sustainable harvestorcatch will beattained,
if during anygiven period of time, humans remove an amount equal to the natural

9
annual increase. However, there are infinite numbers of sustainable harvests along
the natural growth curve, each corresponding to a different population size. So,
which one of this infinite number of choices is most desirable, can be addressed
either by a purely bio-physical viewpoint or the bio-economic perspective.
From the bio-physical viewpoint, the most desirable choice of population would
be the one that maximizes the biomass that can be harvested on a sustainable
basis or as it is called Maximum Sustainable Yield (MSY) i.e. maintaining the
populationsize consistent with the maximum level ofsustainable harvest. Though
it takes full consideration of the relevant biophysical factors affecting the natural
growth function of the resource in question (here fishery), no considerations are
made about either the cost of harvesting the amount of fish biomass or the total
social benefit (as measured by the market value) to be derived from this level of
harvest. If suppose the society can obtain a net benefit (total benefit-total cost)
that is greater than at the maximum sustainable yield harvest level with harvesting
less than the MSY, then the MSY in this case may not represent an economic
optimum (where net benefit is the maximum). In fact, there is onlyone situation
in which a maximum sustainable resource management will certainlybe expected
to yield a result consistent with an economic optimum. This occurs only if, the cost
of labour, capital and other materials used for harvest is assumed to be zero which
is rather an unrealistic situation.
Hence, an alternative approach, the bio-economic perspective, suggests that the
choice of the most desirable sustainable harvest shoulddependupon the interaction
of three key variables: the nature of the underlying natural growth function; the
specific size of the fish population; and the amount of economic resources used
for harvesting. In fisheryeconomics, the phrase fishing effort is used to describe
a composite economic factor (such as labour, capital, energy and other raw
material) used in fish harvesting activities. It is an index of factor inputs with
significant measurementdifficulties.
The production function of a fisherythat shows the relationships among the levels
of catch, effort and population size can be defined as follows:
H = f (B, E)
(4)
Where H is the fish catch or harvest due to human exploitation, E is the level of
fishing effort, and B is the stock or fish biomass or simply the fish population. In
general, this production function speaks that for a given population size, the higher
the level of effort, the larger will be the harvest or catch; and given the level of
effort, the larger the population size, the larger will be the catch.
However, the above interrelationships among the levels of harvest, effort and
population size do not address the issue of whether the harvest under anygiven
condition is sustainable or not. For this, we need to take into consideration, the
natural growth rate of the renewable resource in question that is fish. It is important
to note here that there is a one to one correspondence between effort and
equilibrium population size (where natural growth equals the biomass that can be
harvested on a sustainable basis). That is for a given level of effort, a unique
equilibrium population size will result, yielding a sustainable harvest. This occurs
because harvest is replaced by a natural growth rate. This is referred to as
steady-state bio-economic equilibrium.Algebraically, this equilibrium condition is
attained when the following condition is met:
Economic Theories of
Renewable & Non-
Renewable Resources