Economics of Biotic Resources Ecosystem Structure and Function.

Economics of Biotic Economics of Biotic ResourcesResources

Ecosystem Structure and FunctionEcosystem Structure and Function

Econ of Ecosystem Structure: Econ of Ecosystem Structure: Renewable stock-flowsRenewable stock-flows

• Material flow from a stock over time– Can use stock as fast as we want

– Level of stock affects future flow

Sustainable Yield CurveSustainable Yield Curve

Carrying capacity, MSY and minimum viable Carrying capacity, MSY and minimum viable population (point of critical depensation)population (point of critical depensation)

• Uncertainty and dependence on exogenous variables

• Variation in Critical depensation: Passenger pigeons and Mauritius Kestrel

• Critical depensation for ecosystems

Sustainable harvests and effortSustainable harvests and effort

What is the relationship to scale?

Harvest effort and costHarvest effort and cost

• Yield=catchability quotient x Stock x effortY=qXE

• Stable equilibrium

• Unstable equilibrium

• Where did historical harvests take place?

• Where are they taking place now?

Maximizing annual profit (static):Maximizing annual profit (static):

Profit maximizationProfit maximization

• π = TR-TC• maximum π occurs when MR = MC

Open access fisheryOpen access fishery

• Non-excludable, rival • π = 0

– This is what happens in any competitive market

• What happens when harvest costs are very low?

• What actually happens to harvest costs relative to price over time?

Can you find the tacit assumption responsible for the happy result that profit maximizing exploitation does not require much sock depletion?

Profit maximization (dynamic)Profit maximization (dynamic)

• To move from one point on the sustainable harvest curve to one at a lower stock, we must reduce the stock.

• What happens to the profit made by selling that stock?

Opportunity Costs of Opportunity Costs of Renewable resourcesRenewable resources

• The opportunity cost of not harvesting is equal to the foregone earnings from not investing the profits of that harvest.

• What’s more profitable, letting your redwoods grow at 1% per year, or cutting them down and investing the profits in the stock market at 7% per year?

Opportunity Cost of Renewable Opportunity Cost of Renewable resourcesresources

• The opportunity cost of harvesting another unit of resource– Resource values should increase

• Increasing demand• Decreasing supply

– Renewable resources grow, but a unit harvested today cannot grow

– More stock means cheaper harvest

Dynamic profit MaxDynamic profit Max

• Marginal opportunity costs of harvesting the resource should equal marginal opportunity costs of not harvesting the resource, i.e. MR=MC

• Think about repaying a loan with the profits from reducing the stock

• What if the discount rate is very high?

Dynamic profit MaxDynamic profit Max

When is Extinction Optimal?When is Extinction Optimal?

• Open access• Private ownership, but resource cheap to

harvest, and grows more slowly than investments

Including the fund-serviceIncluding the fund-service

•Passenger pigeons•Sardines•Cassowaries

Characteristics of optimal Characteristics of optimal harvestharvest

• Must account for stock-flow and fund service• Discounting probably not appropriate, and

particularly inappropriate for fund-service component

• Higher stocks, lower harvests than static profit maximizing stock and harvest

• Must account for uncertainty

SummarySummary

What is the relationship to What is the relationship to distribution?distribution?

• Who benefits from ecosystem fund-services?

• Who benefits from the harvest of stock-flows?

• Who deserves profits from harvest of stock-flows?

Natural dividend from renewable Natural dividend from renewable resourcesresources