1

Chapter 10
Mineral Economics
the reminder of the book: will survey specific
resource problems, employ simple tools of
economic analysis to clarify them, and point
toward their possible solution
SECTION V
Applied Natural Resource
Problems
Minerals: Nonrenewable Resources (S

!
S
"
# $
"
%

Inorganic solid substances that are found in

or on the ground and are used by humans

Categories:
fuel mineralscoal, oil, natural gas
oresiron,
nickel
metals
nonfuel minerals precious metals
gold...
industrial minerals
natural
aggregate, cement,
fertilizer
minerals, abrasives, and
gemstones
2
. !eological "actors and Costs of
#$traction

"igure %&, page '

(s the mineral grade )mineral content per

*uantity of material+ decreases, known and
e$pected *uantities of mineral increase

(s the grade decreases, the costs of e$traction

and refining increase

,wo essential *uestions: the socially efficient

rate at which the deposit should be used up- the
economically efficient rate at which geological
e$ploration should be pursued-
3
.. #$traction #conomics for a /nown
0tock

,he two&period e$ample: 1resent value of

net benefits )1234+ 5 3et benefits in year %
6 78)6r+9 )3et benefits in year +

0olving for intertemporal efficiency means to

ma$imize 1234, then:
4
) (
1
1
) ( 0
1 1 0 0
MC p
r
MC p
+
=
) (
1
1
) (
) (
1
1
1
1
0
0
0
0
dq
dC
dq
dB
r dq
dC
dq
dB
dq
PVNB d

+
+ =
) (
1
1
) ( 0
1
1
1
1
0
0
0
0
dq
dC
dq
dB
r dq
dC
dq
dB

+
+ =
0ince r : %, 78)6r+9 ; , so, )p

< =C

+ : )p
%
<
=C
%
+. 0ee "igure %&>, on page '?: *
%
6 *

5
@% 6 ?% 5 >%%.
5
) (
1
1
1 1 0 0
MC p
r
MC p
+
=
Conclusion : *
%
: *

,he dynamically efficient production profile

involves a AtiltB toward the present, in the
sense that e$traction in the first year e$ceeds
that of the second year

Conclusion .: )go back to slide ?+ the

resource rent rises at the rate of discount r
6
) (
1
1
) ( 0
1 1 0 0
MC p
r
MC p
+
=
) (
1
1
) (
1 1 0 0
MC p
r
MC p
+
=
1 0
1
1
rent
r
rent
+
=
0 1
) 1 ( rent r rent + =

Conclusion >: )go back to slide ?+

user cost 5 <

7
) (
1
1
1 1
MC p
r

+
A Review Question
C

Let the inverse demand functions of the two periods

be: p
0
=15 q
0
and p
1
=15 q
1
. Let the marginal
extraction costs be !
0
=5"q
0
and !
1
=5 "q
1
. p =
! in each period occurs at q=5# so if the total
quantit$ is 10 or more# there is essentiall$ no
intertemporal problem# at least if our hori%on is limited
strictl$ to two time periods. &ut suppose there is a
limitation# sa$ q
0
"q
1
'(. ) flat production profile
would have q
0
=q
1
=*. &ut this cannot be efficient if
there is a positive discount rate. +uppose there is.
+how the production profile is tilted toward the present
,use a 10- discount rate..
>. =ineral 1rices in "act

"igure %&D, p.'': E minerals, E%.&EEC,

the F0

up&and&down movement, but overall drop in

prices

,he market simply does not see a *uantitative

restriction in these resources in relevant human&
scale time frame

,echnical change along the whole continuum of

natural resource e$ploration, discovery,
development, e$traction, transportation, and
processing

,he recent upward swing in mineral prices

since .%%@ is the surging demand from
developing countries
9
?. Gesource #$ploration and
Hevelopment

#$ploration and development can increase

the inventory of known deposits

4etter e$ploration methods can make it

possible to e$tract resources of lower grades
and thus to e$pand reserves

"igure %&@, p.'E: =C of e$panding

reservesI demand for reserves

Geductions in e$traction costs )due to

technological changes+ have occurred faster that
demand increase, driving prices down
10
D. 3onrenewable Gesources and
0ustainability

Jow can nonrenewable resources

)minerals+ be used in a sustainable fashion-

we will eventually shift to a substitute resource

of greater abundance )like solar energy+

Invest the resource rents earned from current

mineral e$traction into physical capital )tractors,
+ and human capital
11
@. F.0. =ineral Import Hependence and
Kther 1olicy Issues

,able %&., p.C.: mineral imports as a

percent of consumption show the heavy
dependence on imports to supply domestic
demands

,he C'. =ining Law )still in effect+

set up the claim and patent system so that

prospectors can fill claims on public land found
to contain economically significant mineral
deposits and convert it to private ownership at
low prices

0uggestion: levy a federal royaltya ta$ of $

percent of the net value )price minus e$traction
costs+ of a mineral delivered to the processing
plant
12