Natural Resource Economics
University of Illinois at Urbana-Champaign
Instructor: Brazee, Dick
Subject area: Economics
Department: Natural Resources
Course number: 463
Year taught: 1998
Please note that the copyright for this syllabus is retained by the
Overview: Course Objectives.
The instructor's objectives for course participants are:
i) to develop an overview of the field of natural resource economics and policy
through study of "classic" papers,
ii) to achieve sufficient competence with dynamic optimization techniques to
understand scholarly papers in natural resource economics and to be able to use
dynamic optimization methods to model natural resource policy questions, iii) to
improve research and professional communication skills.
Goal. The instructor's goal is to assist participants in becoming
researchers in the field of natural resource economics and policy.
Substantive Focus. Inter-temporal efficiency issues that arise in the
modeling of natural resource problems.
Format. The course consists of lectures, discussions and student
presentations. To achieve the course objectives it is crucial that assignments
be completed by the due dates.
Preparation. Economics 300 or the equivalent is required. Completion of
Economics 400 or completion or enrollment of Economics 402 is desirable.
Course Grades. Course grades will be assigned on the basis of total
points earned during the semester. The instructor will award a fraction of the
maximum possible points for each assignment. The maximum possible number of
points by type of assignment is:
Verbal Reports--250 (10 each)
The maximum possible number of points is 1100. The grading scale for course is:
Although there is choice on how participants attempt to collect points, it is
expected that everyone will complete at least 12 out 25 verbal reports, the
literature review and the modeling assignment. For tentative assignment due
dates and presentation dates, see the attached course schedule.
Class Participation and Presentations. Everyone is expected to
participate in class discussions including both asking and answering questions
throughout the semester, and leading discussions on homework problems and
verbal reports. All participants are also expected to present their literature
review and modeling assignment. Presentations on the literature review and
modeling assignment should be a maximum of 10 minutes. Everyone is expected to
attend all literature review and modeling assignment presentations.
Final Exam. The final exam is scheduled to be distributed during class on
April 23, and will be due at the end of the university scheduled exam period
(4:30 pm May 9).
Homework Problems. Several homework problems will be assigned throughout
the semester. Each homework problem will be discussed in class after it has been
assigned. Participants are responsible for completing homework problems
before each is discussed in class.
Literature Review. The literature review should critically evaluate and
synthesize several (7-10) scholarly papers within a narrowly defined subject
area. Expected length is 7-10 double-spaced pages. The aim is to write a
literature review that could be included in a submission to a refereed journal.
Participants are free with instructor consent to choose a topic of personal
interest within the field of natural resource economics. Literature reviews on
potential thesis or dissertation topics are encouraged. The reading list by
Hoagland and Stavins in the coursepack is a good source of topics and
Modeling Assignment. A short (7-10 double-spaced pages) modeling
assignment is required. In this assignment participants should verbally justify,
mathematically develop and verbally interpret a dynamic optimization model on a
natural resource economic or policy question of personal interest. Ideally the
economic question developed will be associated with the topic of the literature
review. Modeling assignments will be evaluated on the basis of thoroughness,
verbal clarity and originality.
Mathematical and Verbal Reports. Understanding of many natural resource
economic papers comes only through detailed written analysis. Verbal reports and
mathematical reports help ensure adequate understanding. A verbal report is a
structured evaluation and overview of a paper. Verbal reports should be a maximum
of 1 single-spaced typed page. Although many formats are effective, a
possible format for verbal reports is attached. Feel free to use this form or to
develop your own form. Mathematical reports consist of verifying mathematical
derivations within a paper or a portion of a paper by either detailed verbal
description or direct mathematical proof. Ideally verbal reports should be
written with standard word processing software, while mathematical reports
should be neatly handwritten. Report due dates are listed on the tentative
course schedule. Without prior instructor approval late verbal reports will not
Study Groups. Discussion often promotes understanding of economic
methodology. Participants are encouraged to form 2-4 (ideally 3) person study
groups for discussions and joint work outside of class. Study groups may meet to
discuss lectures and readings, and to jointly work on mathematical reports,
verbal reports and homework problems. The literature review, final exam and
modeling assignment are to be done individually.
-Useful advanced texts in natural resource economics and policy include:
D.W. Bromley (ed.), 1995. The handbook of environmental economics. (Basil
J.M. Conrad and C.W. Clark, 1987. Natural resource economics. (Cambridge
P.S. Dasgupta and G.M. Heal, 1979. Economic theory and exhaustible resources.
(Cambridge University Press)
N. Hanley, J.F. Shogren and B. White, 1997. Environmental economics in theory
and Practice. (Oxford University Press)
P.H. Neher, 1990. Natural resource economics. (Cambridge University
Press) [Maybe out of print.]
-These books are on reserve at the Commerce Library, 101 Library. Purchase of 1
of the following books on dynamic optimization is recommended:
A.C. Chiang, 1992. Elements of dynamic optimization. (McGraw Hill)
M.I. Kamien and N.L. Schwartz, 1991 (Second Edition). Dynamic optimization:
The calculus of variations and optimal control in economics and management.
D. Leonard and N. Van Long, 1992. Optimal control theory and static
optimization in economics. (Cambridge University Press)
Additional readings will be drawn from relevant scholarly journals. These
readings will be available on reserve in the Agriculture Library, 226 Mumford
Hall. Photocopies of most papers are also available for purchase at the Illini
I. INTRODUCTION (January 20-27)
-Neher, pp. vii-ix, 4-10, 113-114, 349-350
-Solow, R.M., 1974. The Economics of Resources or the Resources of Economics? American
Economic Review Papers and Proceedings 64:1-14.
-Hotelling, H., 1931. The Economics of Exhaustible Resources. Journal of
Political Economy 39:137-175. (Assigned pp. 137-140.)
-Devarajan, S. and A.C. Fisher, 1981. Hotelling's Economics of Exhaustible
Resources: Fifty Years Later. Journal of Economic Literature 19:65-73.
-Löfgren, K.G., 1983. The Faustmann-Ohlin Theorem: A Historical Note. History
of Political Economy 15:261-264.
-Scott, A., 1955 The Fishery: the Objective of Sole Ownership. Journal of
Political Economy 63:116-124.
II. TECHNIQUES OF DYNAMIC ANALYSIS (January 29 - February 19)
A. Economic and Mathematical Background
-Neher, pp. 52-57, 126-144 and 282-283
B. Costless Production--Nonrenewable Resources
-Neher, pp. 93-101
-Hotelling, pp. 140-146
-Neher, pp. 271-281
-Neher, pp. 120-124, 145-150 and 162-173
-Dorfman, R., 1969. Economic Interpretation of Optimal Control Theory. American
Economic Review 59:817-31.
-Handout: Dynamic Optimization
-References: Chiang, Kamien & Schwartz, Leonard & Van Long
III. NONRENEWABLE RESOURCES (February 24-March 12)
A. Costly Production
-Neher, pp. 102-111, 287-302 and 311-313
-Slade, M.E., 1982. Trends in Natural Resource Commodity Prices: An Analysis of
the Time Domain. Journal of Environmental Economics and Management
B. Market Structure
-Hotelling, pp. 146-148 and 150-152
-Stiglitz, J., 1976. Monopoly and the Rate of Extraction of Exhaustible
Resources. American Economic Review 66:655-661.
-Hotelling, pp. 164-171
-Neher, pp. 321-326 and 238-244
D. Discount Rate
-Farzin, Y.H., 1984. The Effect of the Discount Rate on Depletion of Exhaustible
Resources. Journal of Political Economy 92:841-851.
E. Uncertainty, Irreversibility and Safe Minimum Standards
-Arrow, K. and A.C. Fisher, 1974. Environmental Preservation, Uncertainty, and
Irreversibility. Quarterly Journal of Economics 88:312-319.
-Bishop, R.C., 1978. Endangered Species and Uncertainty: The Economics of a Safe
Minimum Standard. American Journal of Agricultural Economics 60:10-18.
-Ready, R.C. and R.C. Bishop, 1991. Endangered Species and the Safe Minimum
Standard. American Journal of Agricultural Economics 73:309-312.
IV. FISHERIES AND OPEN ACCESS (March 17-April 9)
A. Open Access
-Neher, pp. 28-30
-Ciriacy-Wantrup, S.V. and R.C. Bishop, 1975. Common Property as a Concept in
Natural Resources Policy. Natural Resources Journal 15:177-185.
-Neher, pp. 256-266
-Neher, pp. 11-26
-C.G. Ploude, 1970. A Simple Model of Replenishable Natural Resource
Exploitation. American Economic Review 60:518-522.
-Neher, pp. 40-44, 177-180 and 195-199
-Clark, C.W. and G.R. Munro, 1975. The Economics of Fishing and Modern Capital
Theory: A Simplified Approach. Journal of Environmental Economics and
-Neher, pp. 35-40
-Clark, C.W., 1973. Profit Maximization and the Extinction of Animal Species. Journal
of Political Economy 81:950-961.
E. Dynamic Behavior
-Neher, pp. 30-35, 180-188 and 204-217
-Tu, P.N.V. and E.A. Wilman, 1992. A Generalized Predator-Prey Model:
Uncertainty and Management. Journal of Environmental Economics and Management
V. COMMONS MANAGEMENT (April 14-April 16)
-Seabright, P., 1993. "Managing Local Commons: Theoretical Issues in
Incentive Design," The Journal of Economic Perspectives 7:113-134.
-Clarke, F.H. and G.R. Munro, 1987. Costal States, Distant Water Fishing Nations
and Extended Jurisdiction: A Principal-Agent Analysis," Natural Resource
-Levhari, D. and L.J. Mirman, 1981. "The Great Fish War: an Example Using a
Dynamic-Nash Solution" Bell Journal of Economics 322-334.
-Gardner, R., M.R. Moore and J.M Walker, 1996. "Governing a Groundwater
Commons: A Strategic and Laboratory Analysis of Western Water Law"
-Sethi, R. and E. Somanathan, 1996. "The Evolution of Social Norms in
Common Property Use" American Economic Review 86:766-788.
VI. FOREST MANAGEMENT (April 21-April 30)
-Neher, pp. 59-80.
-Samuelson, P.A., 1976. Economics of Forestry in an Evolving Society. Economic
-Chang, S.J., 1983. Rotation Age, Management Intensity, and the Economic Factors
of Timber Production: Do Changes in Stumpage Price, Interest Rate, Regeneration
Cost, and Forest Taxation Matter? Forest Science 29:267-277.
-Hartman, R., 1976. The Harvesting Decision When a Standing Forest has Value. Economic
-Binkley, C.S., 1987. When is the Optimal Economic Rotation Longer than the
Rotation of the Maximum Sustained Yield. Journal of Environmental Economics
and Management 14:152-158.
-Löfgren, K.G., 1992. "Another Reconciliation Between Economists and
Forest Experts: Overlapping Generations Arguments," Environmental and
Resource Economics 1:83-95.
Jan. 22 Due: Verbal Report #1-Solow
Jan. 27 Due: Verbal Report #2-Löfgren
Verbal Report #3-Scott
Jan. 29 Due: Verbal Report #4-Hotelling
Feb. 3 Due: Verbal Report #5-Dorfman
Feb. 5 Due: Mathematical Report #1-Dorfman, pp. 818-828
Feb. 24 Due: Verbal Report #6-Slade
Feb. 26 Due: Verbal Report #7-Stiglitz
Mar. 3 Due: First Draft Literature Review
Mar. 5 Due: Verbal Report #8-Farzin
Mar. 10 Due: Verbal Report #9-Arrow and Fisher
Mathematical Report #2-Arrow and Fisher
Mar. 12 Due: Verbal Report #10-Bishop
Verbal Report #11-Ready and Bishop
Mar. 17 Due: Verbal Report #12-Ciriacy-Wantrup and Bishop
Mar. 19 Presentations of Literature Reviews
Mar. 31 Due: Final Draft Literature Review
Verbal Report #13-Ploude
Apr. 2 Due: Verbal Report #14-Clark and Munro
Apr. 7 Due: Verbal Report #15-Clark
Mathematical Report #3-Clark and Munro (pp.92-102)
Apr. 9 Due: Verbal Report #16 Tu and Wilman
Apr. 14 Due: Verbal Report #17-Seabright
Verbal Report #18-Clarke and Munro
Apr. 16 Due: Verbal Report #19-Levhari and Mirman
Apr. 21 Due: Verbal Report #20 Sethi and Somanathan
Apr. 23 Due: Verbal Report #21-Samuelson
Verbal Report #22-Chang
Apr. 28 Due: Verbal Report #23-Hartman
Verbal Report #24-Binkley
Final Exam Distributed
Apr. 30 Due: Verbal Report #25-Löfgren
May 5 Due: Modeling Assignment
Presentations of Modeling Assignments
May 9 Due: (by 4:30 pm) Final Exam
SAMPLE VERBAL REPORT FORM
General Problem Area: (Topics by Key Words)
Significance of Economic Question(s):
Significance of Key Results:
Possible Further Research:
Remember that each verbal report should be a maximum of 1 single-spaced
page. (For clarity, please double-space between sections.)