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Non-Renewable Resource Supply: Substitution Effect, Compensation Effect, and All That

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  • Julien Daubanes
  • Pierre Lasserre

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Abstract

The interaction of supply and demand is at the root of market and other equilibria. Yet no systematic synthetic treatment of non-renewable resource supply exists; equilibrium analyses or welfare statements usually are formulated without any systematic decomposition into supply and demand. In this note, we examine the supply decision of individual non-renewable resource suppliers facing given prices. We establish instantaneous restricted (fixed reserves, treated as capital) and unrestricted supply functions. We decompose the effect of a price change into an intertemporal substitution effect and a stock compensation effect. The later arises when the stock of reserves to be extracted is endogenous. We show that the substitution effect always dominates so that a price increase at some date always causes supply to decrease at all other dates. Thus, despite the formal resemblance of resource supply over the time space with demand over the spectrum of goods, there is no such thing as a possible complementarity between resources extracted at different dates. Yet, as this theory of non-renewable resource supply makes clear, this is what researchers seeking exceptions to the green paradox are trying to identify. Nor is there any peculiarity similar to the Giffen paradox or to the inferior good paradox in resource supply. Besides unifying the treatment of conventional good supply and non-renewable resource supply, this theoretical exercise also shows how to avoid supply aggregation problems that make several existing results or modeling approaches questionable. The properties, first established within a parsimonious model, are shown to hold in a very general setup.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 2012s-28.

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Date of creation: 01 Oct 2012
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Handle: RePEc:cir:cirwor:2012s-28

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Keywords: Non-renewable resource supply; Price effect; Stock effect; Substitution effect; Supply theory; Demand theory; Green paradox;

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  1. Rick van der Ploeg & Cees Withagen, 2010. "Is There Really a Green Paradox?," OxCarre Working Papers 035, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  2. GRAFTON, R. Quentin & KOMPAS, Tom & LONG, Ngo Van, 2011. "Substitution between Biofuels and Fossil Fuels: Is There a Green Paradox?," Cahiers de recherche 10-2011, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  3. 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.
  4. Amigues, J-P & Favard, P.author-name: Gaudet, G. & Moreaux, M, 1996. "On the Optimal Order of Natural Resource Use When the Capacity of the Inexhaustible Substitute is Limited," Cahiers de recherche 9628, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  5. Quyen, N V, 1988. "The Optimal Depletion and Exploration of a Nonrenewable Resource," Econometrica, Econometric Society, vol. 56(6), pages 1467-71, November.
  6. Reyer Gerlagh, 2010. "Too Much Oil," Working Papers 2010.14, Fondazione Eni Enrico Mattei.
  7. Sinn, Hans-Werner, 2008. "Public policies against global warming: A supply side approach," Munich Reprints in Economics 19638, University of Munich, Department of Economics.
  8. Gaudet, Gerard & Lasserre, Pierre, 1988. "On comparing monopoly and competition in exhaustible resource exploitation," Journal of Environmental Economics and Management, Elsevier, vol. 15(4), pages 412-418, December.
  9. Fischer, Carolyn & Laxminarayan, Ramanan, 2005. "Sequential development and exploitation of an exhaustible resource: do monopoly rights promote conservation?," Journal of Environmental Economics and Management, Elsevier, vol. 49(3), pages 500-515, May.
  10. Burness, H. Stuart, 1976. "On the taxation of nonreplenishable natural resources," Journal of Environmental Economics and Management, Elsevier, vol. 3(4), pages 289-311, December.
  11. Pindyck, Robert S, 1978. "The Optimal Exploration and Production of Nonrenewable Resources," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 841-61, October.
  12. David Levhari & Nissan Liviatan, 1977. "Notes on Hotelling's Economics of Exhaustible Resources," Canadian Journal of Economics, Canadian Economics Association, vol. 10(2), pages 177-92, May.
  13. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, September.
  14. Richard L. Gordon, 1967. "A Reinterpretation of the Pure Theory of Exhaustion," Journal of Political Economy, University of Chicago Press, vol. 75, pages 274.
  15. Slade, Margaret E., 1988. "Grade selection under uncertainty: Least cost last and other anomalies," Journal of Environmental Economics and Management, Elsevier, vol. 15(2), pages 189-205, June.
  16. Fischer, Carolyn & Salant, Stephen, 2012. "Alternative Climate Policies and Intertemporal Emissions Leakage: Quantifying the Green Paradox," Discussion Papers dp-12-16, Resources For the Future.
  17. Salant, Stephen, 2012. "The Equilibrium Price Path of Timber in the Absence of Replanting," Discussion Papers dp-12-38, Resources For the Future.
  18. Cairns, Robert D, 1990. " The Economics of Exploration for Non-renewable Resources," Journal of Economic Surveys, Wiley Blackwell, vol. 4(4), pages 361-95.
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Cited by:
  1. repec:fae:wpaper:2014.07 is not listed on IDEAS
  2. Julien Daubanes & André Grimaud & Luc Rougé, 2013. "Green Paradox and Directed Technical Change: The Effect of Subsidies to Clean R&D," CESifo Working Paper Series 4334, CESifo Group Munich.
  3. Rick van der Ploeg, 2012. "Breakthrough Renewables and the Green Paradox," CESifo Working Paper Series 3986, CESifo Group Munich.
  4. Saraly Andrade de Sa & Julien Daubanes, 2014. "Limit-Pricing and the Un(Effectiveness) of the Carbon Tax," OxCarre Working Papers 136, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.

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