Wednesday, May 30, 2007

What happens when we run out of non renewable resources?

Free Essay: Discuss the Economic Effects of running out of non renewable raw materials

1. Higher prices of raw materials. As Supply falls price will rise. Demand for many of these goods is inelastic; therefore the price rise could be significant.

2. This would lead to an increase in costs of production, Therefore it would cause the SRAS curve to shift to the left. This would lead to a higher inflation rate and lower economic growth.

However, it is worth bearing in mind that higher raw material prices don't necessarily lead to inflation and lower economic growth. There are many other factors that affect inflation. Cost push inflation from raw materials may be offset by technological advances.

3. Countries who rely on importing raw materials will see an increase in costs. However, they are unlikely to lose competitiveness because it will effect all countries. However, those countries who import the most raw materials will see a deterioration in their current account on the balance of payments.

4. Countries who export these raw materials may see an increase in export revenues. This is because demand is inelastic for these goods. However, there will come a point when they run out of raw materials altogether, negatively effecting their export revenue. This could be very damaging for countries.

5. In the long run, rising prices of scarce commodities will provide incentives for firms and governments to develop alternatives. For example, in recent years there have been developments in finding viable alternatives to petrol. As the price of petrol increases, it becomes more attractive to use hydrogen / solar powered cars. However, markets don't always predict future shortages. Free markets respond to price changes rather than anticipate in advance. Therefore, to develop effective substitutes for some raw materials may lead to market failure. For example, the research starts when it is too late. Therefore, the effect may depend upon whether governments intervene to subsidise the alternatives.

see also: Should we be concerned with running out of oil?

No comments: