Nature and types of resource, Microeconomics

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Nature and Types of Resource

From the economists' point of view, natural resources are most conveniently viewed as stocks of capital, which provide potential flows of services. How to make optimal use of the stocks over time? Time is a crucial dimension that helps us distinguish between different types of resources. A renewable resource is one that can regenerate itself and hence can supply productive inputs to an economic system indefinitely. Exhaustible resources on the other hand is the one with finite stock; once used up, the stock is gone. For example, coal is exhaustible because it takes millions of years for its formation. Even for the renewable resource, depending on the rate at which it is harvested over time, the stock size changes.

Obviously, natural resources share the two special characteristics of capital stock. First one is 'durability', which implies that past decisions and present opportunities available are linked, i.e., past decision affects current stock and present consumption affects future stock. Hence, the economic agent is confronted with inter-temporal decisions.

Second one is 'sluggishness', which means that capital stock cannot be adjusted instantly without incurring some adjustment costs. Since the population of natural organism exhibits rates of increase limited by their intrinsic population biology, there are adjustment costs of reduction in stock. For instance, some stocks, which are clustered and easily harvested, may be reduced with virtually no increase in costs; but for other resources as stocks thin out, it is increasingly expensive to harvest the remaining units so that the adjustment costs of reduction in stock is increasing.


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