Natural Resource Economics (University of Illinois at Urbana-Champaign)

Natural Resource Economics

University of Illinois at Urbana-Champaign
Urbana, Illinois

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 instructor.

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:

Class Participation--200
Final Exam--100
Literature Review--150
Modeling Assignment--250
Mathematical Reports--150
Verbal Reports--250 (10 each)

The maximum possible number of points is 1100. The grading scale for course is:

A 850-1100
A- 800-850
B+ 750-800
B 650-750
B- 600-650
C+ 550-600

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 references.

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 be accepted.

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.

READING LIST
-Useful advanced texts in natural resource economics and policy include:

D.W. Bromley (ed.), 1995. The handbook of environmental economics. (Basil Blackwell)

J.M. Conrad and C.W. Clark, 1987. Natural resource economics. (Cambridge University Press)

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. (Elsevier/North-Holland)

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 Union Bookstore.

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

C. Methods
-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 9:132-137.

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.

C. Taxation
-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

B. Fisheries--Static
-Neher, pp. 11-26
-C.G. Ploude, 1970. A Simple Model of Replenishable Natural Resource Exploitation. American Economic Review 60:518-522.

C. Fisheries--Dynamic
-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 Management 2:92-106.

D. Extinction
-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 23:123-138

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 Modeling 2:81-107.
-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 Inquiry 16:466-492.
-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 Inquiry 14:52-58.
-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.

Important Dates:

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

SPRING BREAK

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
Identification: (Citation)
General Problem Area: (Topics by Key Words)
Economic Question(s):
Significance of Economic Question(s):
Key Assumption(s):
Modeling Approach:
Key Results:
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.)