CHAPTER 19
Natural Resource and Energy Economics
A. Short-Answer, Essays, and Problems
1. Describe the changes in population and living standards since 1800. What implications do these changes
raise about standards of living today?
2. Explain the view of Thomas Malthus on population growth in 1789 and contrast it with what has happened
since that time.
3. Define total fertility rate and replacement rate. Use them to describe the population prospects for many
developed countries.
4. State the predictions about world population growth offered by demographers and explain the basis on
which they are made.
5. What are likely factors that have contributed the rapid increase in population from 1800 to today?
6. Why is the overall world population still increasing? What are the expectations for population growth in
the future?
7. To what factors do demographers attribute the decline in birthrates? How has the economic view of
children changed?
8. Assume that the current generation or first generation consists of 20 million people, half of whom are
women. If the total fertility rate is 1.2 and the only way people die is of old age, how big will the second
generation be? In percentage terms, how much smaller is second generation than the previous generation?
9. Describe the three-step shift known as the demographic transition.
10. (Consider This) Can government raise birthrates?
11. State two reasons why dire predictions of falling standards of living and a decline in resource availability
proved to be wrong.
12. Compare the real cost of commodity resources today (circa 2009) with their cost in the 1845–1850 period.
What explains the change?
13. What are the likely trends for the demand for and the supply of resources in the future?
14. Describe the trends in total and per capita water use, energy consumption, and trash generation in the
United States from 1950 to 2000. What do they indicate about resource use?
15. What is likely to happen to resource demand in the next few decades?
16. What is energy economics and what does it have to say about energy demand and efficiency?
17. Use the case of electrical power generation to explain why the energy resource inputs that are used are
sometimes low-cost and other times high-cost.
18. Make the case that the United States is not running out of oil or energy.
19. (Consider This) Wind and solar energy has many benefits over coal and gas. Are there any downsides? If so,
discuss.
20. (Consider This) Many still use coal and gas to get their energy. Use marginal analysis to discuss the point at
which these forms of energy will be replaced by wind and solar energy. How might this occur?
21.What are net benefits and how do they relate to natural resource economics?
22. Distinguish between and give examples of nonrenewable resources and renewable resources.
23. Explain how present value calculations are used to evaluate future possibilities in the case of oil. Give an
example using a present value calculation.
24. Give an example of the use of the time value of money in the study of natural resource economics.
25. What is the tradeoff in the extraction of nonrenewable resources?
26. Consider the mining of a nonrenewable resource over a two-year period by a company.
(a) Use a graph to help explain the choice between present and future extraction of a nonrenewable
resource over a two-year period. In the explanation state the difference between extraction and user
cost.
(b) How does the addition of user cost to extraction costs affect the quantity extracted in the present
compared with the future?
(c) How do profit calculations influence the quantity extracted the first year or the second year?
(d) What will happen to the quantity extracted in the present compared with profitability increase in the
future? Explain the effects on the graph.
27. Explain how market failures such as the lack of property rights affect extraction of resources by business
firms.
28. The table below shows the quantity of coal per ton, the extraction cost per ton, and user cost per ton for the
BTU Coal Company in the current year.
Quantity
Extraction
Cost
User
Cost
0
$100
$50
1
150
50
2
200
50
3
250
50
4
300
50
5
350
50
(a) If the current price of a ton of coal is $200, how many tons of coal should BTU extract and sell this
year to maximize profits?
(b) If the current price of a ton of coal is $300, how many tons of coal should BTU extract and sell this
year to maximize profits?
(c) BTU has been told by government regulators that it must cease operations in a year. If the current
price of a ton of coal is $250, how many tons of coal should BTU extract and sell this year to
maximize profits?
(d) If user costs increase by $50 at each level of output and if the current price of a ton of coal is $300,
how many tons of coal should BTU extract and sell this year to maximize profits?
29. What are conflict diamonds and what do they illustrate about resource use?
30. How is elephant preservation affected by property rights?
31. How do profit incentives and property rights affect the management of a renewable resource such as a
forest? Why do some nations have growing or sustainable forests and other nations experience
deforestation?
32. Explain what is needed for optimal harvesting of a forest. How do changes in economic incentives and
structures affect present and future decisions?
33. Define fishery and describe the resource problem with fisheries.
34. Discuss the problems with policies to limit catch size and the use of the total allowable catch (TAC) policy.
35. What is an individual transferable quota (ITQ)? How can it be used with the total allowable catch (TAC)
for making fishing more efficient and sustainable?
36. Fisher Mike can catch salmon for $11 per ton and fisher Tony can catch salmon for $8 per ton. Both Mike
and Tony have an individual transferable quota (ITQ) to catch 1000 tons of salmon. The market price of
salmon is $13 per ton.
(a) If both Mike and Tony catch fish that year, what will be the profit for Mike and what will be the profit
for Tony?
(b) If next year, Mike trades his quota for the year to Tony, how much should Mike be paid for the quota
to make more than he can by fishing?
(c) Mike decides to trade his ITQ for the year to Tony. What will be the reduction in fishing cost to
society now that only Tony is doing the fishing?
37. (Consider This) Describe the Tragedy of the Commons and how it relates to public grazing plots.
38. (Consider This) One neighborhood garden is experiencing a problem. All neighbors are expected to work
to produce the harvest and all share in the bounties, but some never work and only participate when the
harvest is distributed. Discuss this problem in terms of the Tragedy of the Commons. How might this
problem be reduced?
39. (Last Word) Discuss the evidence on whether economic growth is bad for the environment.
B. Answers to Short-Answer, Essays, and Problems
1. Describe the changes in population and living standards since 1800. What implications do these changes
raise about standards of living today?
2. Explain the view of Thomas Malthus on population growth in 1789 and contrast it with what has happened
since that time.
3. Define total fertility rate and replacement rate. Use them to describe the population prospects for many
developed countries.
4. State the predictions about world population growth offered by demographers and explain the basis on
which they are made.
5. What are likely factors that have contributed the rapid increase in population from 1800 to today?
6. Why is the overall world population still increasing? What are the expectations for population growth in
the future?
7. To what factors do demographers attribute the decline in birthrates? How has the economic view of
children changed?
8. Assume that the current generation or first generation consists of 20 million people, half of whom are
women. If the total fertility rate is 1.2 and the only way people die is of old age, how big will the second
generation be? In percentage terms, how much smaller is second generation than the previous generation?
9. Describe the three-step shift known as the demographic transition.
10. (Consider This) Can government raise birthrates?
11. State two reasons why dire predictions of falling standards of living and a decline in resource availability
proved to be wrong.
12. Compare the real cost of commodity resources today (circa 2015) with their cost in the 1845–1850 period.
What explains the change?
13. What are the likely trends for the demand for and the supply of resources in the future?
14. Describe the trends in total and per capita water use, energy consumption, and trash generation in the
United States from 1950 to 2010. What do they indicate about resource use?
15. What is likely to happen to resource demand in the next few decades?
Resource demand is likely to increase significantly during the next few decades as more countries
16. What is energy economics and what does it have to say about energy demand and efficiency?
17. Use the case of electrical power generation to explain why the energy resource inputs that are used are
sometimes low-cost and other times high-cost.
18. Make the case that the United States is not running out of oil or energy.
19. (Consider This) Wind and solar energy has many benefits over coal and gas. Are there any downsides? If
20. (Consider This) Many still use coal and gas to get their energy. Use marginal analysis to discuss the point
at which these forms of energy will be replaced by wind and solar energy. How might this occur?
21. What are net benefits and how do they relate to natural resource economics?
22. Distinguish between and give examples of nonrenewable resources and renewable resources.
23. Explain how present value calculations are used to evaluate future possibilities in the case of oil. Give an
example using a present value calculation.
24. Give an example of the use of the time value of money in the study of natural resource economics.
25. What is the tradeoff in the extraction of nonrenewable resources?
26. Consider the mining of a nonrenewable resource over a two-year period by a company.
(a) Use a graph to help explain the choice between present and future extraction of a nonrenewable
resource over a two-year period. In the explanation state the difference between extraction and user
cost.
(b) How does the addition of user cost to extraction costs affect the quantity extracted in the present
compared with the future?
(c) How do profit calculations influence the quantity extracted the first year or the second year?
(d) What will happen to the quantity extracted in the present compared with profitability increase in the
future? Explain the effects on the graph.
(a) See graph.
(a) The decision between present and future extraction can be illustrated with a graph that shows a firm’s
27. Explain how market failures such as the lack of property rights affect extraction of resources by business
firms.
A
B
Q0
Q1
Q2
0
D
C
F
E
First Year Quantity Extracted
P
EC
TC = EC + UC
28. The table below shows the quantity of coal per ton, the extraction cost per ton, and user cost per ton for the
BTU Coal Company in the current year.
Quantity
Extraction
Cost
User
Cost
0
$100
$50
1
150
50
2
200
50
3
250
50
4
300
50
5
350
50
(a) If the current price of a ton of coal is $200, how many tons of coal should BTU extract and sell this
year to maximize profits?
(b) If the current price of a ton of coal is $300, how many tons of coal should BTU extract and sell this
year to maximize profits?
(c) BTU has been told by government regulators that it must cease operations in a year. If the current
price of a ton of coal is $250, how many tons of coal should BTU extract and sell this year to
maximize profits?
(d) If user costs increase by $50 at each level of output and if the current price of a ton of coal is $300,
how many tons of coal should BTU extract and sell this year to maximize profits?
29. What are conflict diamonds and what do they illustrate about resource use?
30. How is elephant preservation affected by property rights?
31. How do profit incentives and property rights affect the management of a renewable resource such as a
forest? Why do some nations have growing or sustainable forests and other nations experience
deforestation?
32. Explain what is needed for optimal harvesting of a forest. How do changes in economic incentives and
structures affect present and future decisions?
33. Define fishery and describe the resource problem with fisheries.
34. Discuss the problems with policies to limit catch size and the use of the total allowable catch (TAC) policy.
35. What is an individual transferable quota (ITQ)? How can it be used with the total allowable catch (TAC)
for making fishing more efficient and sustainable?
36. Fisher Mike can catch salmon for $11 per ton and fisher Tony can catch salmon for $8 per ton. Both Mike
and Tony have an individual transferable quota (ITQ) to catch 1000 tons of salmon. The market price of
salmon is $13 per ton.
37. (Consider This) Describe the Tragedy of the Commons and how it relates to public grazing plots.
38. (Consider This) One neighborhood garden is experiencing a problem. All neighbors are expected to work
to produce the harvest and all share in the bounties, but some never work and only participate when the
harvest is distributed. Discuss this problem in terms of the Tragedy of the Commons. How might this
problem be reduced?
39. (Last Word) Discuss the evidence on whether economic growth is bad for the environment.