Question

a. Graphically illustrate how, in a two period model of a nonrenewable resource, economic efficiency in the presence of a positive rate of discount implies increased consumption (and lower prices) today, than would be observed with a discount rate of zero. (7 points) b. What are some of the factors that could make social user costs different from private user costs in the case of mineral extraction? (6 points) c. Graphically illustrate how user cost is affected by the expectation that future demand for a resource will shift outward on today’s efficient rate of extraction. (7 points)

Answer 1

a.,in a two period model of a nonrenewable resource, economic efficiency in the presence of a positive rate of discount implies increased consumption today and higher prices and lower consumption tomorrow than would be observed with a discount rate of zero:

social user cost is the overall cost the society has to bear for consuming minerals as a non renewable resource of energy .Private user cost involves overhauling costs like mineral extractions and cost of mining as an externality to the society

positive rate of discount means , more consumption today and less save for future .This means that future consumption falls that earns no rate of discount as benefit to the society

C1 +C2 /1+i <I ( total availability of resources )

b.the factors that could make social user costs different from private user costs in the case of mineral extraction:

Extraction creates many environmental issues at local, international & national levels. It changes the elemental condition of the earth, but whether it does environmental harm depends upon how it impacts the services provided by ecosystem disturbed. Mining has adverse effects on groundwater & nearby streams but the extent to which these effects should be lessened depends upon a comparison of the social advantages & costs involved. Private costs & social costs are usually confused in analyzing environmental concerns. Private costs impact balance sheet of persons & companies ; social costs are suffered by other members of community. It is sometimes claimed that if a private company pays for the cost of environmental protection , then no social cost is involved. This isn’t correct as the private costs tend to be included in the price of the articles / are manifested in social costs. Social costs have varied impacts on various social classes. Generally, environmental costs should be endured by the producers who are responsible for environmental harm or by the customers who may be responsible for harm.

c. user cost is affected by the expectation that future demand for a resource will shift outward on today’s efficient rate of extraction:

Future demand C(1+i)+C2 <_ E+ E2/(1+i)

representing the decision of consumption based on future demand analysis