Economics of Natural Resources

Practice exam

November xx

Answer all the questions in the exam. If you run out of space, you can use the last page.

Name:

Student number:

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Question 1.
Please explain the following terms

a. Pareto-efficiency:

b. Kaldor-Hicks efficiency:

c. Social planner:

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Question 2.
The three graphs below illustrate the development of the price of a nonrenewable resource
(solid blue line) and the marginal extraction costs (dashed black line) in three cases.

(i) (ii) (iii)

$

Time Time Time

Which of these graphs are in line with the (generalized) Hotelling’s rule introduced in class,
when the interest rate is positive (δ > 0)? (Pick one of the alternatives below.)

a. Only graph (i)

b. Only graph (ii)

c. Only graph (iii)

d. All of the graphs

e. None of the graphs

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Question 3.
The price of a non-renewable resource is decreasing over a long period of time. What reason
could explain such a price development, even if all the market actors are rational? (Pick one.)

a. Extraction costs are decreasing in time due to technological development

b. The market is competitive and therefore the price approaches the marginal extraction cost
in the long run

c. The market is monopolistic

d. None of the above

e. All of the above

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Question 4.
There are two owners of the resource in a market, both with the same constant marginal extrac-
tion cost c and facing the same interest rate δ. You are a small, price-taking agent. The other
firm is a monopolist. When is it optimal for you to sell and why?

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Question 5.
Caselli et al. (2015) studied the impact of natural resources in interstate wars. Which of the
following claims is true, based on their theory and empirical findings? (Pick one alternative)

a. When oil is only in one country, the probability of conflict decreases when oil is located
closer to the border

b. Two countries with resources are less likely to experience a conflict than two countries
without resources

c. Conflict is less likely when only one of the countries has resources

d. New resource discovery in one country will always make war more likely

e. All of the above

f. None of the above

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Question 6.
Let Q(T ) be the forest growth function, T is the rotation time and δ is the discount rate. What
is the condition for maximizing the total harvest (biomass) over infinite rotations? (Pick one
alternative.)

a. Q0 (T ) = 0

b. Q0 (T ) = Q(T )/T

c. Q0 (t) = δQ(T )

d. None of the above

e. All of the above

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Question 7.
Consider a developing country, split into several independent districts, where logging causes
deforestation. Other things held constant, would a following observation be consistent with the
sales-driven model (strong regimes), the illegal logging model (weak regimes) or both:

Sales-driven Illegal logging

model model Both models
(strong regimes) (weak regimes)
Less extraction in one district
(a)
increases timber prices
Districts benefit from a
(b)
higher timber price
Conservation in one district causes
(c)
negative externalities to the others
Large districts cut relatively
(d)
more (in %)
Decentralization leads to
(e)
more deforestation
It is cheaper to make a REDD+
(f) contracts with the central government
than with the local districts

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Question 8.
Please give two advantages of individual transferable quotas (ITQs)?

Advantages: 1)

2)

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Question 9.
Consider the Easter Island model with two sectors, manufacturing and resource sector with
open-access. Which of the following claims is true? (Pick one).

a. Population growth always increases the prices of manufacturing goods

b. There is no steady state in the Easter Island model

c. A higher harvesting coefficient α has ambiguous effect on the steady-state resource stock

d. None of the above

e. All of the above

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Question 10.
A country is a closed economy with manufacturing sector and a resource sector with open-
access. Which of the following claims is true? (Pick one.)

a. The country would always benefit from access to the international markets when it be-
comes a net importer of the resource

b. The country would always benefit from access to the international markets when it be-
comes a net exporter of the resource

c. The country would never benefit from access to the international markets when it be-
comes a net exporter of the resource

d. None of the above

e. All of the above

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Question 11.
Two players commonly own a resource of size 10, with price normalized to one. Each player
can either extract or conserve the resource. The payoffs are shown in the table below1 :

Player B
Conserve Extract
Player A Conserve x,x 0,10
Extract 10,0 5,5

Briefly discuss the differences in potential outcomes between the two cases: (i) x > 10 and (ii)
x < 10.

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The numbers in the table are payoffs for players A and B, respectively.

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Question 12.
Consider an animal species with open-access and a possibility to privately store the animal
product after being harvested (the elephant model). Explain in your own words what happens
in the two equilibria:
.
a) “Good equilibrium” where the species survives:

b) “Bad equilibrium” where the species becomes extinct:

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Question 13.
Explain the resource curse hypothesis and discuss one economic and one political mechanisms
for the resource curse to arise. .

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Question 14.
Consider two farmers A and B who are using water from the same water body. Farmer B holds
senior water rights and farmer A holds junior rights. The farmers’ demand for water is given
by:

Price p=0 p=1 p=2 p=3 p=4

Farmer A,
8 units 4 units 2 units 1 units 0 units
demanded quantity
Farmer B,
4 units 2 units 1 units 0 units 0 units
demanded quantity

How much water is used by each farmer when:

.

a) Trading is not allowed and there is a flood (12 units of water)

Farmer A uses: , Farmer B uses:

b) Trading is not allowed and there is drought (6 units of water)

Farmer A uses: , Farmer B uses:

c) Trading is allowed and there is a flood (12 units of water)

Farmer A uses: , Farmer B uses:

d) Trading is allowed and there is drought (6 units of water)

Farmer A uses: , Farmer B uses:

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Question 15.
Describe the two queuing systems riparian water rights and prior appropriation. Do these sys-
tems ensure that water flows to the highest value user? Why/why not?

Riparian:

Prior appropriation:

Water to highest valued user:

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