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Nonconvexity, efficiency and equilibrium in exhaustible resource depletion

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Author Info

  • Anthony Fisher
  • Larry Karp

Abstract

We consider the problem of efficiency and existence of a competitive equilibrium in exhaustible resource markets where extraction costs are nonconvex. Nonconvexity is shown to imply that (1) (efficient) extraction ceases to the left of the minimum efficient scale, i.e., where average costs exceed marginal costs; and (2) a competitive equilibrium does not exist. Introduction of a backstop technology (which induces a flat portion of the industry demand curve) restores both existence and efficiency, provided that the backstop price is sufficiently low. If firms face even a small amount of uncertainty regarding their rivals' stocks, a backstop technology is sufficient to restore existence of competitive equilibrium, even if the backstop price is very high. In this case, however, the competitive equilibrium is not efficient. Copyright Kluwer Academic Publishers 1993

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File URL: http://hdl.handle.net/10.1007/BF00338322
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Bibliographic Info

Article provided by European Association of Environmental and Resource Economists in its journal Environmental & Resource Economics.

Volume (Year): 3 (1993)
Issue (Month): 1 (February)
Pages: 97-106

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Handle: RePEc:kap:enreec:v:3:y:1993:i:1:p:97-106

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Web page: http://www.springerlink.com/link.asp?id=100263

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Keywords: Exhaustible resource; nonconvex costs; existence of competitive equilibrium;

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References

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  1. John Hartwick & Murray Kemp & Ngo van Long, 1980. "Set-up Costs and Theory of Exhaustible Resources," Working Papers 412, Queen's University, Department of Economics.
  2. Gilbert, Richard J, 1979. "Optimal Depletion of an Uncertain Stock," Review of Economic Studies, Wiley Blackwell, vol. 46(1), pages 47-57, January.
  3. Schulze, William D., 1974. "The optimal use of non-renewable resources: The theory of extraction," Journal of Environmental Economics and Management, Elsevier, vol. 1(1), pages 53-73, May.
  4. 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, vol. 91(1), pages 154-67, February.
  5. Farrow, Scott, 1985. "Testing the Efficiency of Extraction from a Stock Resource," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 452-87, June.
  6. Dasgupta,P. S. & Heal,G. M., 1985. "Economic Theory and Exhaustible Resources," Cambridge Books, Cambridge University Press, number 9780521297615, October.
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Cited by:
  1. Chermak, Janie M. & Crafton, James & Norquist, Suzanne M. & Patrick, Robert H., 1999. "A hybrid economic-engineering model for natural gas production," Energy Economics, Elsevier, vol. 21(1), pages 67-94, February.
  2. Mason, Charles F., 2012. "On equilibrium in resource markets with scale economies and stochastic prices," Journal of Environmental Economics and Management, Elsevier, vol. 64(3), pages 288-300.
  3. Fischer, Carolyn, 1998. "Once-and-for-All Costs and Exhaustible Resource Markets," Discussion Papers dp-98-25, Resources For the Future.
  4. Holland, Stephen P., 2003. "Set-up costs and the existence of competitive equilibrium when extraction capacity is limited," Journal of Environmental Economics and Management, Elsevier, vol. 46(3), pages 539-556, November.
  5. Robert Cairns, 2008. "Exhaustible Resources, Non-Convexity and Competitive Equilibrium," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 40(2), pages 177-193, June.
  6. Chermak, Janie M. & Patrick, Robert H., 2001. "A Microeconometric Test of the Theory of Exhaustible Resources," Journal of Environmental Economics and Management, Elsevier, vol. 42(1), pages 82-103, July.

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