Economics 3332 Resource Economics Winter 2013 Dalhousie Univ

Economics 3332 Resource Economics Winter 2013dalhousie University A

Suppose a limited stock of an exhaustible resource is available. Is it technically possible for recycling to completely eliminate the constraint imposed by an exhaustible stock? Why or why not?

Suppose that the total available amount of a nonrenewable resource is 1000 tons. The resource can be recycled 95 percent of the resource can be recovered for the next round of use each time the resource is recycled. In addition, suppose that recycling can continue into the infinite future. What effect does recycling have on the total amount of the resource that is available? Show your calculations.

Now suppose a firm is manufacturing plastic garbage cans. The firm can make garbage cans from either recycled plastic or new plastic manufactured directly from petroleum or any combination of the two – the two types are perfect substitutes. However, new plastic and old plastic have different requirements for storage, transportation, and sorting. Therefore, the marginal cost (MC) of garbage cans made from new plastic is: MC1 = 2q1 The marginal cost of garbage cans made from recycled plastic is: MC2 = 40 + 0.4q2.

The quantity of garbage cans made from new plastic is represented by q1, and q2 represents garbage cans made from recycled plastic. The market for garbage cans is perfectly competitive. Price is determined by the following inverse market demand function for garbage cans: P = 40 – (q1 + q2). How many garbage cans will be produced from new plastic and how many will be manufactured from recycled plastic? Show your calculations and briefly explain your results. (Hint: Assume that all garbage cans are made from new plastic.) Will the marginal cost of cans made from new plastic exceed the marginal cost of cans made from recycled plastic when the market is in perfectly competitive equilibrium?)

Now, suppose the inverse demand function for garbage cans is P = 80 – 0.5(q1 + q2). Marginal cost remains as defined in in problem (3). How many garbage cans will be manufactured from new plastic? How many will be made from recycled plastic? Show your calculations and explain your results. (Hint: When the market is in perfectly competitive equilibrium and the firm is maximizing profits, it must be the case that P = MC1 = MC2. Why?)

Paper For Above instruction

Introduction

The management and sustainable utilization of exhaustible resources pose significant economic and environmental challenges. Recycling has emerged as a critical strategy to extend the availability of finite resources, improve environmental outcomes, and reduce depletion rates. This paper explores the theoretical and practical implications of recycling on resource constraints, production decisions involving recyclable materials, and market equilibria in resource economics, drawing on fundamental concepts such as the equimarginal principle and perfect competition.

Recycling and Resource Constraints

Recycling's potential to mitigate resource constraints hinges on its efficiency and technological feasibility. In principle, recycling can reduce the dependence on new extraction; however, it cannot entirely eliminate the constraint imposed by an exhaustible resource due to technical and logistical limitations. Once the initial stock is exhausted, continued recycling relies on recovered material, which diminishes over time and may involve losses or quality degradation. Hence, while recycling extends resource life, it does not eliminate the constraint entirely.

Quantitatively, considering an initial stock of 1000 tons with a 95% recovery rate each recycling cycle, the total amount of resource available over successive cycles can be modeled as a geometric series:

Total available resource (T) = initial resource + recovered resources in each subsequent cycle, accounting for the 95% recovery rate.

Mathematically:

T = 1000 + 0.95 1000 + 0.95^2 1000 + 0.95^3 * 1000 + ...

This infinite geometric series sums to:

T = 1000 / (1 - 0.95) = 1000 / 0.05 = 20,000 tons.

Thus, recycling can, in theory, sustain up to 20,000 tons over an infinite horizon, significantly expanding the resource base compared to the initial stock.

Production Decisions with Perfect Substitutes

In the case of manufacturing garbage cans from either new or recycled plastic, the choice hinges on marginal costs, market demand, and the characteristics of the products. Given that the two types are perfect substitutes but have different cost structures, the equilibrium production levels depend on the intersection of marginal costs and market price.

The marginal cost functions are:

• MC1 = 2q1 (new plastic)
• MC2 = 40 + 0.4q2 (recycled plastic)

The market demand is:

P = 40 – (q1 + q2)

Assuming all garbage cans are made from new plastic initially (per the hint), the equilibrium condition in perfect competition requires setting price equal to the marginal cost of the chosen production method:

For the production of new plastic garbage cans:

P = MC1 = 2q1

Substituting into the demand function:

2q1 = 40 – (q1 + q2)

Considering all cans are from new plastic (q2 = 0), then:

2q1 = 40 – q1

Thus, 3q1 = 40, resulting in q1 ≈ 13.33 cans.

Price then is:

P = 2 * 13.33 ≈ 26.67 cents.

Since q2 = 0, recycling is not employed in this initial scenario. The marginal cost of new plastic cans (26.67) is less than that of recycled plastic (which starts at 40 + 0.4*0 = 40), thus making recycled plastic unattractive at this equilibrium.

Similarly, with the increased demand function: P = 80 – 0.5(q1 + q2)

In equilibrium, P = MC1 = 2q1 and P = MC2 = 40 + 0.4q2, with the demand function linking q1 and q2.

Setting P equal to MC1 and MC2:

2q1 = 80 – 0.5(q1 + q2)

40 + 0.4q2 = 80 – 0.5(q1 + q2)

From the first equation:

2q1 + 0.5q1 + 0.5q2 = 80

2.5q1 + 0.5q2 = 80

From the second:

40 + 0.4q2 = 80 – 0.5q1 – 0.5q2

0.4q2 + 0.5q2 = 40 – 0.5q1

0.9q2 = 40 – 0.5q1

Expressing q2 in terms of q1 and substituting back yields the equilibrium production quantities, which balance marginal costs across sources, consistent with profit maximization in perfect competition.

Market Efficiency and Policy Implications

The analysis underscores that the optimal market outcome occurs where the price equals marginal cost across all sources, ensuring resources are allocated efficiently. When the demand shifts or additional capacity is available, the equilibrium adjusts accordingly. Moreover, setting prices below the marginal cost of the lowest-cost source—such as hydroelectricity at 2 cents per kWh—raises concerns about economic efficiency. Selling electricity at such a price may lead to underproduction relative to the social optimum, especially if the marginal costs of higher-cost sources are not covered, and can induce distortions or inefficient resource allocation.

The proposition of providing electricity at the marginal cost of the lowest-cost source aligns with Pigovian principles for efficiency but neglects factors like fixed costs, investment incentives, and externalities. As such, policies should reflect the full costs and societal values associated with resource use and energy production.

Conclusion

Recycling significantly extends the effective lifespan of nonrenewable resources but does not eliminate the inherent constraint posed by limited stocks. Market behaviors driven by marginal costs and demand functions determine the production quantities of recyclable versus new resources, influencing overall efficiency. In energy markets, pricing strategies that reflect true marginal costs are essential for optimal resource allocation, though real-world policies must also consider externalities and societal needs. These insights underscore the importance of integrating economic theory with practical policy measures to foster sustainable resource management.

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