Suppose thatMr. Bill has an oil field containing 100 barrels of oil on his property.

He can hire a firm from a neighboring town to pump his oil at a total economic cost of $1 per barrel—but because it is scarce, the price of oil is $2 per barrel, well above cost.5 Scarcity of the oil means that Mr. Bill can earn a resource rent of $1 per barrel from its production. Resource rents develop when, due to absolute scarcity of resources, prices get bid up above the total economic cost of production (see Chapter 3). They are thus a form of economic profit.

If all the oil is produced and sold today:

1. How much will Mr. Bill’s net income (economic profits) rise for the year?

2. If Mr. Bill spends all the income on a new 80-inch color TV (which he keeps locked up in his bedroom), how much worse off are his children?

3. If Mr. Bill’s family were the sole residents of the country of Billsville, how much would Billsville GDP rise?

4. How much would Billsville NNW rise?

The big question addressed by the Billsville situation is this: to what extent does GDP overstate true NNW as a result of the current generation running down the stock of natural capital? We are seeking a way to measure the wealth that we of the current generation are taking away from future generations by using up scarce natural capital.