Question

Use Ch. 6 to answer the following question. Suppose a depletable natural resource has a renewable substitute. The depletable resource can be extracted from the ground at an increasing marginal cost. The renewable substitute can be extracted at a constant marginal cost. Furthermore, the marginal willingness to pay exceeds the marginal cost for the initial quantities, so it is worth extracting at least some of the resource. Assume a dynamically efficient allocation of the resources.

1. Suppose technological progress occurs in the extraction methods of the depletable resource. What happens to the amount of the depletable resource that is extracted relative to the amount that would have been extracted before the technological progress? Does it affect the switch point (if one occurs)? Explain.
2. Suppose instead that technological progress occurs in the extraction methods of the renewable resource. What happens to the amount of the depletable resource that is extracted relative to the amount that would have been extracted before the technological progress? Does it affect the switch point (if one occurs)? Explain.

Answer 1

Any good/resource is produced only when its marginal benefits are greater than the marginal costs.

Suppose technological progress occurs in the extraction methods of the depletable resource. Hence due to this the marginal costs decrease and we can produce more of it relatively to the amount that would have been extracted before the technological progress. Yes it does affect the switch point as we can produce more of the depletable resource and the point where marginal costs get bigger than marginal benefits comes at a later time in production.

Suppose technological progress occurs in the extraction methods of the renewable resource. Hence due to this the marginal costs decrease and we can produce more of it relatively to the amount that would have been produced per day before the technological progress. Hence the relative marginal cost of depletable resource seems to get higher and the production of the depletable resource is shut down at an earlier point of production. Hence the switch point occurs at an earlier stage and less of the depletable resource is produced relative to the amount that would have been extracted before the technological progress.

We can understand these situations with the help of supply curve shifts as well. For the depletable resource, its supply curve shifts downwards in the first case and upwards in the second case, and hence the equilibrium quantities get larger and get reduced respectively.