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On equilibrium in resource markets with scale economies and stochastic prices

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  • Mason, Charles F.

Abstract

In this paper, I show the existence and the characteristics of equilibrium in a non-renewable resource market where extraction costs are non-convex and market price is subject to stochastic shocks, an empirically relevant setting. In my model firms may be motivated to hold inventories to facilitate production smoothing, which allows them to continue producing at a smooth pace at any instant when extraction ceases, e.g. when reserves are exhausted. This aspect of the model then supports a competitive equilibrium in the presence of non-convex costs. Casual empirical evidence is provided that supports the central features of my model for a variety of non-renewable resources, lending credence to the explanation for equilibrium I propose.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 64 (2012)
Issue (Month): 3 ()
Pages: 288-300

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Handle: RePEc:eee:jeeman:v:64:y:2012:i:3:p:288-300

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Web page: http://www.elsevier.com/locate/inca/622870

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Keywords: Resource economics; Inventories; Stochastic dynamic optimization;

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References

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  8. Eswaran, Mukesh & Lewis, Tracy R & Heaps, Terry, 1983. "On the Nonexistence of Market Equilibria in Exhaustible Resource Markets with Decreasing Costs," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(1), pages 154-67, February.
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  15. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262022834, December.
  16. Dixit, Avinash K, 1989. "Hysteresis, Import Penetration, and Exchange Rate Pass-Through," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(2), pages 205-28, May.
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Cited by:
  1. Antoine Bommier & Lucas Bretschger & Fran├žois Le Grand, 2014. "Existence of Equilibria in Exhaustible Resource Markets with Economies of Scale and Inventories," CER-ETH Economics working paper series, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich 14/203, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.

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