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Dynamic Investment In Extraction Capacity Of Exhaustible Resources

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  • Hamed Ghoddusi

Abstract

This paper studies a resource extraction problem with capacity constraints, expansion options and stochastic demand process. The producer has to decide on the optimal rate of extraction and the optimal time to build further capacity simultaneously. Using numerical methods to solve the problem, it is shown that previous results which suggest that extraction capacity should be built at the beginning, are not necessarily true under uncertainty. I derive equations for the optimal time to build extra capacity. The results of this paper can contribute to better understanding of long‐run energy and commodity supply.

Suggested Citation

  • Hamed Ghoddusi, 2010. "Dynamic Investment In Extraction Capacity Of Exhaustible Resources," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(3), pages 359-373, July.
    • Handle: RePEc:bla:scotjp:v:57:y:2010:i:3:p:359-373
    DOI: 10.1111/j.1467-9485.2009.00522.x
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    References listed on IDEAS

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    1. Harry F. Campbell, 1980. "The Effect of Capital Intensity on the Optimal Rate of Extraction of a Mineral Deposit," Canadian Journal of Economics, Canadian Economics Association, vol. 13(2), pages 349-356, May.
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    8. Harold Hotelling, 1931. "The Economics of Exhaustible Resources," Journal of Political Economy, University of Chicago Press, vol. 39(2), pages 137-137.
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    Cited by:

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    6. Di Corato, Luca, 2013. "Profit sharing under the threat of nationalization," Resource and Energy Economics, Elsevier, vol. 35(3), pages 295-315.

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