Question

Compare and contrast static and dynamic efficiency applied to the fossil fuel market. Compare and contrast the concepts of resource rent and user cost as applied to this market and the potential differences in optimal resource use under static and dynamic efficiency.

Answer 1

The Cheif normative economic criteria for choosing among various outcomes occuribng at te same point in time is called STATIC EFFICIENCY, or merely efficiency.

While DYNAMIC EFFICIENCY is a generaluzation of the static efficiency case. Dynamic efficiency not only considers the magnitude of the benefits and costs but also considers the timing of the benifits and costs.

Static efficiency is concerned with the most efficient combination of existing resources at a given point in time. It is also concerned with allocative efficiency the optimal distribution of resources in an ECONOMY.

STATIC EFFICIENCY contrasts with DYNAMIC EFFICIENCY. This is concerned about the development of better technology and working practices which improve the efficiency of production over a period of time.

It is important for firms to make the best use of given resources. But they also need to develop the productivity of resources and production methods over a period of time. While in DYNAMIC EFFICIENCY its criteria is to allocate resources across in time periods that maximises the present value of net benfits from the use of the resources.

While the condition is the present value of MARGINAL Net Benefits from the last UNIT consumed in each period must be equal. In regards to the issue of Stimulation of technological progress by different instruments. A delictaebalance has to be struck between the amount of diffrential and technological rent to be given to the producers and their equipment manufacturers in order to stimulate R&D investments in risky tecnologies, and the colloective cost of the incentive policy to the economy.

With quantity-based instruments governed by Market Mechanisms, technological progress sharply reduces the rent allocated to producers and consequently cost for community. Moreover making producers compete with one another through competitive bid forces them to adopt the most efficient technologies in order to be awarded contracts.

However, as this involves restricting their profit margins by eliminating or limiting the rent derived from technological progress. They have difficulty in initiating the innovation prcess by investing in R&D.

In this situation, Public R&D is the ony way to improve technology. At a current point in time, the mst efficient trading priorty for a devloping econmy maybe to concentrate on low-cost labour intensive industry.

However, in the long-term, it may be more efficient to devlop capital ad technology to enable a higher wage and more productivity economy.