Managerial Economics in MBA - Essay Example

Marginal Concept Renewable and non-renewable resources are being utilized in ways that are unsustainable in many countries in Europe and around the world. The costs of this non-sustainability should be valued and enumerated, to establish the desirability of these developmental paths. The appropriate concept to use is the marginal opportunity cost that measures the social costs of depletion of resources. This concept can be viewed in the context of the developmental process that puts emphasis on the relationship between development and the environment. This relationship can be described as co-evolutionary rather than one that trades off material against the quality of the environment. Measuring marginal opportunity cost should reflect the intricate ecological and physical inter-linkages that exist within an ecosystem, allowing for the relationship between soil erosion, deforestation, sedimentation and stream-flow. In turn, marginal opportunity cost is comprised of direct costs from the use of resources, externalities that arise from inter-linkages of the ecosystem, and user component that comes from the use of resources in a non-sustainable way. 1. Most of Europe’s coal mines have closed down. There are still large reserves of coal available. Under what circumstances would you envisage businesses opening up coal mines and exploiting these resources? Europe still possesses plenty of coal resource reserves. In some cases, these are not easy to access although they can still be mined. The question that arises when considering the probability of their exploitation is their economic viability. The decline witnessed in the 80s regarding mining of coal, as well as the closure of mines, was done because extraction costs for coal became too high given the shifting focus of the global market (Ali & Jeffrey 21). The market began to move towards the use of gas to produce electricity, as well as use of coal from countries where mining was extra economically viable. However, as Europe becomes a net exporter of gas and oil again as supplies start to run out, they will be forced to be more reliant on supplies of gas from unfriendly economies like Russia or price-hiking Sheikhs from the Middle East. As the price of gas continues to rise due to these factors, the development of technology will alter the relationship that exists between coal’s marginal cost and its marginal revenue (Ali & Jeffrey 21). Another way that coal could become viable again is through a new method of making it clean in order to offset its environmental destruction (Ali & Jeffrey 29). Coal causes major environmental destruction, and for its marginal revenue to be above its marginal costs, then it has to be cleaned. Several European countries have begun efforts towards this. One technology, which could see the environmental cost of coal go down, is carbon capture technology. The chilled Ammonia process is a commercially mature technique that captures and sequesters approximately 90% of CO2 emitted. The process needs the separation of NO, SO, mercury, acid gases and particulate matter from the stream of products. Additionally, the waste products resulting from carbon capture can be recycled for other processes, thus increasing marginal revenues from the use of coal. Ammonium Sulphate can be used for agricultural purposes. The Ammonium Sulphate has insignificant amounts of Selenium; therefore, the carbon capture process can also be used for improving the quality of drinking water and reducing fish deformity. Finally, stagnating growth in the European Union economies and the UK has led to decreased generation of electricity, which, in turn, means less demand for carbon allowances and lower prices with regards to the ETS (Ali & Jeffrey 31). With nuclear power under attack after a series of accidents in Russia and Japan, coupled with the aforementioned high gas prices, the marginal cost of coal is due to drop, with revenues raising as most countries look for alternative means. 2. Discuss the relevance of marginal concepts to the destruction of the rain forest. Deforestation might occur because of such practices as slash and burn or because people cut down trees for industrial use or fuel. Slash and burn can be defined as a technique of forestry that involves the cutting of shrubs and trees on large land swaths, allowing them to lose moisture, and then burning them (Cistulli 111). While it is an effective and rapid method of clearing large chunks of land to convert it into agricultural land, it is also cited as the leading cause of worldwide deforestation because of its extreme destruction when practiced unsustainably. Many forests in Europe bear signs of slash and burn, as do those in Australia and Africa. When practiced on a small scale with an environmentally aware mind, then its effects are not that harmful. The cleared land undergoes a brief fertility burst because of the large amount of biomass, which was burned and it can be farmed for a few planting seasons before being allowed to return to forest cover. If practiced on a slow rotation with a couple of decades in between each burning episode, then it increases marginal value of the deforestation process (Cistulli 121). It allows for the improving health of the forest by allowing it to establish itself, as well as replenishment of the soil. However, when done on a large scale and continuously, it leads to increased marginal costs compared to decreasing marginal revenues, which makes it unsustainable. Rain forests provide renewable and essential sources such as medicines, oils, animal products and firewood when properly managed. However, value of products from rainforests to human populations that live locally is ignored in economic analysis for development decisions. Major sections of the population around rainforests depend on them daily. Although the management of non-timber products has major potential, these resources continue to be lost via the destruction of the forests. Over 2 million people depend on timber in Brazil without damaging the integrity of the forest biologically. Recent studies prove that the value of non-timber products in tropical forests far outweighs the value of the timber (Cistulli 124). In Peru, the economic value of forest products exceeds the value of timber by 9 to 1. This shows that the marginal revenue from using non-timber products from rainforests far outweigh the marginal revenue of using the forests as sources of timber. 3. How might an understanding of marginal concepts help to establish strategies to conserve as opposed to destroying natural resources? Consider ONLY crude Oil. As NGOs from developing countries have pointed out, there is no chance to stop people from destroying nature without finding a solution to the debt crisis (Markandya 43). Most nations in developing countries with crude oil reserves are also highly indebted to developed nations. They are under pressure to mine and sell as much oil as possible in order to finance this debt repayment. The conditions that the World Bank and the IMF impose on these countries force them to sell their oil reserves far in excess of what is sustainable. To facilitate the exploitation of oil fields using the concept of marginal field would need the amendment of acts that govern the oil industries in these countries. This should see a provision for both compulsory and voluntary farming-out of marginal oil fields. Marginal fields refer to a field with marginal oil reserves or fields with oil reserves that cost too much to exploit. The marginality is subjective and varies with perception of a country, organization, and the individual. In some cases, they can be fields with economically unviable reserves for major oil corporations but which can be profitable if exploited by entrepreneurs from the region because of operating and overhead costs. For example, most countries view the fields as those that produce less than ten thousand barrels per day. Canada and America consider them as those that produce less than twenty barrels per day. In the North Sea, marginal fields are considered as those that have less than one hundred million barrels of oil in reserves (Hackett 54). For a field to be considered marginal, it must have an exploratory well in its structure. Additionally, it must have been a known as reserves for more than ten years, must be considered unfit for development by license holders because of prevailing fiscal terms, and have crude oil characteristics that differ from current streams that cannot be produced using conventional technology and methods. Additionally, these fields could also have low reserves of crude oil but high reserves of gas. To protect other resources like forests, the government, could consider leasing these fields out to the local community. To do this, the marginal revenue from the oil reserves, must be significantly higher than the marginal costs of using other resources like wood and trees (Sherman 87). Works Cited Ali, Rozali. & Jeffrey, Vincent. Managing Natural Wealth: Environment and Development. Washington D.C: Resources for the Future, 2009. Print. Cistulli, Vito. Environment in Decentralized Development: Economic and Institutional Issues. Rome: FAO, 2009. Print. Hackett, Steven. Environmental and Natural Resources Economics: Theory, Policy, and the Sustainable Society. Armonk: M.E. Sharpe, 2010. Print. Markandya, Anil. Policies for Sustainable Development . Rome: Food and Agriculture Organization, 2008. Print. Norton, Roger. Agricultural Development Policy: Concepts and Experiences. Hoboken: Wiley, 2007. Print. Sherman, Howard & Hunt E. Economics : An Introduction to Traditional and Progressive Views. Armonk: M.E. Sharpe, 2008. Print. Read More