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The Relationship Between Price and Extraction Cost for a Resource with a Backstop Technology

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Geoffrey Heal

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Abstract

This paper analyzes the optimal depletion policy for a country with a resource which is inexhaustible but available in various grades and at various costs. Cost is assumed to increase with cumulative extraction up to a point, but then to remain constant as a "backstop" supply is reached. This models accurately the supply conditions of minerals which may eventually be extracted from marine sources or crystal rocks. Emphasis is placed on the behavior of prices along an optimal (competitive) path, and it is shown that the price-cost relationship is very different from the standard one of an exponentially growing royalty.

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Publisher Info
Article provided by The RAND Corporation in its journal Bell Journal of Economics.

Volume (Year): 7 (1976)
Issue (Month): 2 (Autumn)
Pages: 371-378
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Handle: RePEc:rje:bellje:v:7:y:1976:i:autumn:p:371-378

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  1. John Rowse, 1991. "Discount Rate Selection and Efficiency in Allocating a Nonrenewable Resource," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 127(II), pages 245-265, June. [Downloadable!]
  2. Junsoo Lee & John A. List & Mark Strazicich, 2005. "Nonrenewable Resource Prices: Deterministic or Stochastic Trends?," NBER Working Papers 11487, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. LAFFORGUE Gilles & MAGNE Bertrand & MOREAUX Michel, 2007. "Energy Substitutions, Climate change and Carbon sinks," Working Papers 07.01.222, LERNA, University of Toulouse. [Downloadable!]
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  4. Hernando Zuleta, 2008. "Energy saving innovations, non-exhaustible sources of energy and long run; what would happen if we run out of oil," DOCUMENTOS DE TRABAJO 004593, UNIVERSIDAD DEL ROSARIO - FACULTAD DE ECONOMÍA. [Downloadable!]
  5. Holger Wacker, 1987. "Die optimale Allokation von Arbeit in Abfallbehandlungsaktivitäten," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 123(IV), pages 467-481, December. [Downloadable!]
  6. A. fnMarvasti, 1996. "Reserve characteristics and mining costs An empirical study of the phosphate industry," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 7(4), pages 357-373, June. [Downloadable!] (restricted)
  7. Toman, Michael & Krautkraemer, Jeffrey, 2003. "Fundamental Economics of Depletable Energy Supply," Discussion Papers dp-03-01, Resources For the Future. [Downloadable!]
  8. Michael Hoel, 2008. "Bush Meets Hotelling: Effects of Improved Renewable Energy Technology on Greenhouse Gas Emissions," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  9. Eismont Oleg & Kuralbaeva Karlygash, 1999. "Depletion of Natural Resources and Long-term Perspectives of the Russian Economy," EERC Working Paper Series 99-07e, EERC Research Network, Russia and CIS. [Downloadable!]
  10. Elin Berg, Snorre Kverndokk and Knut Einar Rosendahl, 1999. "Optimal Oil Exploration under Climate Treaties," Discussion Papers 245, Research Department of Statistics Norway. [Downloadable!]
  11. Lafforgue, Gilles & Magne, Bertrand & Moreaux, Michel, 2006. "Optimal Sequestration Policy with a Ceiling on the Stock of Carbon in the Atmosphere," IDEI Working Papers 401, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  12. Ujjayant Chakravorty & Darrell Krulce & James Roumasset, 2003. "Specialization and Nonrenewable Resources: Ricardo meets Ricardo," Emory Economics 0305, Department of Economics, Emory University (Atlanta). [Downloadable!]
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  13. Hotel , Michael, 2008. "Bush Meets Hotelling: Effects of Improved Renewable Energy Technology on Greenhouse Gas Emissions," Memorandum 29/2008, Oslo University, Department of Economics. [Downloadable!]
  14. A. Marvasti, 2000. "Resource Characteristics, Extraction Costs, and Optimal Exploitation of Mineral Resources," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 17(4), pages 395-408, December. [Downloadable!] (restricted)
  15. Felipe Montt, 1982. "Un Modelo de Equilibrio Dinámico para Recursos Agotables," Cuadernos de Economía (Latin American Journal of Economics), Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 19(57), pages 217-242. [Downloadable!]
  16. James A Roumasset & Lee H Endress, 2000. "Sustainable Development Without Constraints," Working Papers 200009, University of Hawaii at Manoa, Department of Economics. [Downloadable!]
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