On Equilibrium in Resource Markets with Scale Economies and Stochastic Prices
AbstractI consider a non-renewable resource market where extraction costs are non-convex and market price is subject to stochastic shocks. While competitive equilibrium cannot exist if costs are non-convex and demand is deterministic, equilibrium can be supported in the context of stochastic demand. The crucial distinction is that the noisy environment can create an incentive for firms to hold inventories. Inventories allow firms to continue producing at a smooth pace at any instant when extraction ceases, e.g. when reserves are exhausted. Accordingly, there are no abrupt changes in the expected price path, in contrast to the deterministic variant of the model.
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Bibliographic InfoPaper provided by Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford in its series OxCarre Working Papers with number 073.
Date of creation: 2012
Date of revision:
Resource Economics; Stochastic Dynamic Optimization;
Other versions of this item:
- 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.
- Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-25 (All new papers)
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