The Efficient Use Of Multiple Sources Of A Nonrenewable Resource Under Supply Cost Uncertainty
AbstractUncertainties as to future supply costs of nonrenewable natural resources, such as oil and gas, raise the issue of the choice of supply sources. In a perfectly deterministic world, an efficient use of multiple sources of supply requires that any given market exhausts the supply it can draw from a low cost source before moving on to a higher cost one; supply sources should be exploited in strict sequence of increasing marginal cost, with a high cost source being left untouched as long as a less costly source is available. We find that this may not be the efficient thing to do in a stochastic world. We show that there exist conditions under which it can be efficient to use a risky supply source in order to conserve a cheaper non risky source. The benefit of doing this comes from the fact that it leaves open the possibility of using it instead of the risky source in the event the latterâs future cost conditions suddenly deteriorate. There are also conditions under which it will be efficient to use a more costly non risky source while a less costly risky source is still available. The reason is that this conserves the less costly risky source in order to use it in the event of a possible future drop in its cost. Lâincertitude sur le coÃ»t futur dâune ressource non renouvelable telle le pÃ©trole ou le gaz pose la question du choix des sources dâapprovisionnement. Dans un monde dÃ©terministe, lâutilisation efficace de sources multiples exige que tout marchÃ© Ã©puise une source de coÃ»t relativement faible avant de passer Ã une source de coÃ»t plus Ã©levÃ©; lâutilisation des sources dâapprovisionnement doit se faire strictement par ordre de coÃ»t marginal croissant; on ne touchera Ã aucune source de coÃ»t Ã©levÃ© tant quâexiste une source moins coÃ»teuse. Nous montrons que cette rÃ¨gle nâest pas forcÃ©ment efficace en univers stochastique. Il existe des conditions sous lesquelles il peut Ãªtre efficace de recourir Ã une source risquÃ©e pour conserver u
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Bibliographic InfoArticle provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.
Volume (Year): 52 (2011)
Issue (Month): 1 (02)
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Other versions of this item:
- GAUDET, Gérard & LASSERRE, Pierre, 2008. "The Efficient Use of Multiple Sources of a Nonrenewable Resource under Supply Cost Uncertainty," Cahiers de recherche 04-2008, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- GAUDET, Gérard & LASSERRE, Pierre, 2008. "The Efficient Use of Multiple Sources of a Nonrenewable Resource under Supply Cost Uncertainty," Cahiers de recherche 2008-04, Universite de Montreal, Departement de sciences economiques.
- Gérard Gaudet & Pierre Lasserre, 2008. "The Efficient Use of Multiple Sources of a Nonrenewable Resource Under Supply Cost Uncertainty," CIRANO Working Papers 2008s-08, CIRANO.
- Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D90 - Microeconomics - - Intertemporal Choice - - - General
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