Microeconomics Asteroid Mining Assignment

Microeconomics Asteroid Mining Assignment Words: 1948

March 2013 Ever since a recent asteroid almost collided with the Earth and the ensuing attempt to sell the precious metals that it may have left behind, there has een much excend talk of “‘asteroid miasteroidpotential business venture that may allow us to harvest the rare metals and elements within asteroids that are needed to fuel many industrial undertakings. These elements are not only rare and valuable, but expensive. People think that doing the harvesting in space and bringing the loot back home will make them a big profit, but the laws of supply and demand dictate otherwise.

There are currently two options being explored: transporting precious metals to Earth, or doing the mining in space and living in zero-gravity environments, while being sustained y the life-giving elements of the asteroids: nitrogen, oxygen, and water. Both options pose challenges; for the first case, it seems economically impossible, while the latter option may be better suited for robots rather than humans. Time will tell if asteroid-mining becomes a viable business venture, or merely remains science fiction.

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During the past 20 years the demand for products that rely on precious metals and rare earth elements has been increasing rapidly. These metals are valued for their unique properties. They are used in the production of computer hard drives, smartphones,smartness wind turbine magnets, light ulbs, communalbsion infrastructure, oil refining, and car production. Consequently, in order for the world to sustain and improve upon current technological advancements, these minerals are a necessity. Currently, the US accounts for 5% of the world population but is responsible for 40% of the rare earth and precious metal consumption(l).

Supply needs to increase if current technology is going to spread to the rest of the world. The economic pie will certainly grow as these required materials become more readily available thereby increasing the size of the slice for everyone. Obstacles exist n acquiring rare earth elements. Currently China is the world leader in production. China owns 95% of the global market for rare earth elements and has the ability to shut the market down causing global shortages of necessary inputs. As recently as 2010 China announced that they would significantly restrict their rare earth exports(2).

This announcement led to record high price levels. To further magnify the problem, rare earth elements are rarely found on earth in concentrations high enough for economic extraction. Quickly adjusting production to other parts of the globe is not an ption, whichoptions supply for these elements extremely inelastic. Their properties are so unique that very few substitutes exist. There is no quick way to increase supply and at the current rate of consumption many of these elements will be depleted in the next 30 years(3).

This mixture of increased demand, limited supply, and a dependence on trade with a volatile partner has made it more attractive for new producers to enter the rare earth and precious metals market. The increased attention has led to one particularly interesting solution, mining asteroids. Some near earth asteroids only 500 eters wide cdetersn nearly twice the total global amount of platinum metals. A metallic asteroid with a diameter less than a mile wide may contain over $20 trillion of rare metals to extract (3).

Furthermore, these same asteroids contain volatiles such as nitrogen, hydrogen, and methane that can be utilized during the extraction process. In economics, individuals are considered rational and constantly weigh benefits and costs when evaluating a particular option. Deciding to mine asteroids in space for rare and precious metals is no different. Entrepreneurs and would-be space investors should pply the cosapplynefit principle and consider the potential benefits of mining asteroids and the associated costs before engaging in this pioneer market.

Currently, billionaire entrepreneurs are exploring the possibility of cashing in on the huge bounty of rare metals and potential sources of energy floating in space. Eric Schmidt, Larry page, and Richard Branson haveBrannonbuted capital to Planetary Resources. The company’s mission is to harness valuable minerals from a practically infinite source to provide stability on Earth, increase humanitys prhumanity and to help establish and maintain human resence in sresent.

Even though a metallic asteroid with a diameter less than a mile wide may contain over $20 trillion of rare metals to extract there are significant costs from transportation, extraction, infrastructure development, opportunity costs, and overhead. Two-ounces of asteroid material brought back to Earth are estimated to cost $1 billion (1). Methods and available technology will also influence benefits and costs. Mining asteroids may be more cost-effective if the metals are consumed on the asteroid itself instead of transporting the material back to Earth (1).

Robots ill play a key role since asteroid conditions are difficult for humans to endure. Future advances in robotics may lower extraction costs and increase the availability of rare and precious metals to mine moving forward. If the potential benefits outweigh the costs, then entrepreneurs and investors should pursue mining asteroids. Conducting a cost and benefit analysis is an effective method when determining if entrepreneurs should mine asteroids, but marginal analysis is more appropriate when determining the optimal quantity to mine. The optimal quantity is reached when the marginal revenue nd the margiNDl cost are equal.

Atthis pointThisgain is maximized. In order to maximize net gain and reduce marginal costs, the more easily accessible objects need to be targeted first. New producers will follow the principle of increasing opportunity costs and pursue the lowest costs resources first. Many scientists feel that the moon and near earth asteroids are prime targets. Initially the process will incur significant costs with minimal benefits; however, as information accumulates and techniques are perfected this relationship should shift significantly due to a higher success rate.

If nformation iinformatione to inform companies which elements are present on specific asteroids and when and where the asteroid will be passing at an acceptable range then a plan can be assembled to efficiently complete the task. Greater efficiency and advancements in technology will reduce costs and shift the supply curve further to the right. Eventually, vast amounts of metals can be utilized in space or brought back to earth. Supplying Earth with vast amounts of currently rare materials will certainly have an effect on markets. The elasticity Of supply is typically inelastic when a product has inite quantiuniteand very few substitutes.

Rare and precious metals on Earth are limited in supply and are a significant part of our industrial lifestyle. Presently, this market has a steep supply curve where changes in price are met with smaller changes in quantity supplied. Supplies are inflexible and producers are limited in bringing more material to market to take advantage of higher prices. These factors lead to a current elasticity of supply between zero and one. The development and drive to increase efficiency in asteroid mining could decrease the time to market and increase ease of production to hange the cuhangedly inelastic supply to an elastic supply condition.

Furthermore, markets will be affected by an increase in the amount of suppliers, a decrease in input prices Of related goods, and an increase from advances in production technology. If suddenly, very rare resources, like iron, nickel, platinum, cobalt, and titanium, were introduced into the market, the supply curve would be affected. First, the increased presence of these materials in the market due to asteroid mining would be the “supply-shifter. ” We would note a change in supply as the result of new suppliers of these elements entering the market.

It is important to note that this would also change the elasticity of supply, and make the supply curve less inelastic. Due to the increase in suppliers of these precious resources, the supply curve would shift to the right along a stable demand curve thereby creating a temporary surplus. The temporary surplus would create downward pressure on price. Given the potential for a vast amount of material entering the market, the surplus may persist for a significant time, which would lead to a sustained price decrease and an increase in the quantity supplied. Following the law of demand, the lower rice will stimulate consumers to buy more.

As the supply curve moves to the right to a new market equilibrium, the equilibrium quantity will increase, however, the equilibrium price is expected to decrease (Figure 1). If alternative uses or an increase in demand of the materials never develop, the increase in quantity supplied would drive the price downward, making the venture potentially unprofitable. The opportunity for profit seems to lie mainly with conventional sources Figure 1: Displays the shift of the supply curve from SO to Sl due to adSSLncements in production technology and an increase in producers ntering the enterings and rare earth metal market. ecoming scarComing an ongoing exponential increase in the demand for technology products and green energy production that rely heavily on rare earth and precious metals. Companies mining asteroids for the main purpose of returning elements to earth would have to determine the best quantity of the good to produce. Optimally, the market would eventually achieve an equilibrium as economic surplus is maximized. Maximizing economic gain will also be achieved by managing opportunity costs. Distance and the related cost of transportation are is the majorin actomajoringuencing limiting opportunity costs.

Entrepreneurs and space investors may consider mining planets instead of asteroids as their next best option. The closest and most familiar object, the moon, should be exploited first. Initial costs can be limited even further by focusing on the more easily extractable substances such as water. By implementing the principle of increasing opportunity costs, producers can target extracting hHydrogen inhydrogenn be used to fuel missions to farther objects, thereby reducing the distance and costs required to reach the thousands of near earth objects.

The techniques used to extract the easily obtainable elements can transfer to extracting be used as trial runs for the more difficult elements, which would reduce future the costs compared to a company that chose to start with the difficult elements. As knowledge and experience increase, companies will accumulate comparative advantages leading to increased trade prospects and profit potential. Currently, the most attractive option for trade is China. However, China has become more hostile towards the US. and is to reAndon a trade partner that may not be concerned with our best interests.

The benefit of dealing with China is the relative ease of access and the minimal amount of resources required to obtain rare earth elements. By developing an alternative method, we give up easy access in exchange for resource independence and future advantages. As the need for rare earth and precious elements continues to increase with an inelastic supply, prices will certainly rise until another cost effective source is exploited to achieve an increase in the quantity supplied at each price level. A continued effort to achieve success in mining asteroids seems crucial for technological dvancements advancements and spread worldwide.

Additional advantages may be amassed in the form of knowledge gained, an increase in funding for space exploration, and the production of related goods from advancements achieved in mining asteroids. People can argue that research has continued for 30 years at the cost of billions of dollars and not one ounce of material has been returned to earth. The costs over the last 30 years are sunk costs and should not be considered in future cost-benefit analysis. The potential for profit appears to be great once the right amount of knowledge and echnology isgenealogyted.

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