Extraction cost, scarcity rent and institutional choice: three reflections of resource scarcity

Abstract

Resources are provided by nature and they may be very scarce or very abundant relative to the quantity demanded. When resources are scarce, scarcity may be reflected in rising extraction costs and high rents. When resources are abundant, that may be indicated by common property or other non-traditional arrangements to govern resource use. As production of both scarce and abundant resources accumulates over time, economists are challenged to predict changes in costs, rents and institutions. This dissertation proposes models and empirical analysis, of specific mineral and water resource industries, to begin to improve the understanding of resource price trends and the ability to forecast events based upon those trends. The logic explaining the sequence of chapters in this dissertation is as follows. A model of institutional choice, in California water districts, takes priority in Chapter Two. Given the institutional background, resource extraction costs are most directly affected by the characteristics of resources being extracted and by resource prices. Accordingly, a mine investment model is presented in Chapter Three which emphasizes the impact of an important resource attribute, deposit volume; upon project cost and outputs in U.S. copper mines. This model is then used as one component of the rent model in Chapter Four. The rent model ~elates long run changes in extraction costs to mineral scarcity rents. Each chapter may also be read as an independent analysis of a specific public policy problem. Chapter Two addresses the impact of proposed legislation to end flat rate water sales in California water districts. Chapter Three forecasts the impacts of a trade embargo upon U.S. copper production. Chapter Four evaluates copper, coal and oil extraction cost trends and suggests that these trends are not a cause for policy concern.