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 latter’s 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.
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Bibliographic InfoPaper provided by Centre interuniversitaire de recherche en économie quantitative, CIREQ in its series Cahiers de recherche with number 04-2008.
Length: 28 pages
Date of creation: 2008
Date of revision:
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Security of suly; Uncertainty; Nonrenewable resources; Order of use;
Other versions of this item:
- Gérard Gaudet & Pierre Lasserre, 2011. "The Efficient Use Of Multiple Sources Of A Nonrenewable Resource Under Supply Cost Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(1), pages 245-258, 02.
- 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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