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Exploration and Exhaustible Resources: The Microfoundations of Aggregate Models

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  • Swierzbinski, Joseph E
  • Mendelsohn, Robert

Abstract

The appropriate specifications for aggregate extraction and exploration cost functions are derived from a disaggregate model of the search for low-cost deposits of an exhaustible resource. The common practice of combining the no-discovery extraction cost function with exploration is shown to result in a misspecified model for which the total cost of extracting the resource is not well defined. The widely accepted prediction that the anticipated discovery of low-cost deposits results in a U-shaped price path appears to be an artifact of this misspecification. For the authors' properly specified cost functions, the predicted resource price always rises. Copyright 1989 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Swierzbinski, Joseph E & Mendelsohn, Robert, 1989. "Exploration and Exhaustible Resources: The Microfoundations of Aggregate Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(1), pages 175-186, February.
  • Handle: RePEc:ier:iecrev:v:30:y:1989:i:1:p:175-86
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    Cited by:

    1. Moreno-Cruz, Juan & Taylor, M. Scott, 2017. "An energy-centric theory of agglomeration," Journal of Environmental Economics and Management, Elsevier, vol. 84(C), pages 153-172.
    2. Kristine Grimsrud, Knut Einar Rosendahl, Halvor B. Storrøsten, and Marina Tsygankova, 2016. "Short Run Effects of Bleaker Prospects for Oligopolistic Producers of a Non-renewable Resource," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    3. John Livernois & Henry Thille & Xianqiang Zhang, 2006. "A test of the Hotelling rule using old-growth timber data," Canadian Journal of Economics, Canadian Economics Association, vol. 39(1), pages 163-186, February.
    4. repec:bla:econom:v:84:y:2017:i:335:p:345-364 is not listed on IDEAS
    5. Gaudet, Gérard, 1990. "Commentaire," L'Actualité Economique, Société Canadienne de Science Economique, vol. 66(4), pages 461-466, décembre.
    6. Hamilton, Kirk & Atkinson, Giles, 2013. "Resource discoveries, learning, and national income accounting," Policy Research Working Paper Series 6505, The World Bank.
    7. Okullo, Samuel J. & Reynès, Frédéric & Hofkes, Marjan W., 2015. "Modeling peak oil and the geological constraints on oil production," Resource and Energy Economics, Elsevier, vol. 40(C), pages 36-56.
    8. Lin, C.Y. Cynthia, 2009. "An Empirical Dynamic Model of OPEC and Non-OPEC," Working Papers 225895, University of California, Davis, Department of Agricultural and Resource Economics.
    9. Nyambuu, Unurjargal & Semmler, Willi, 2014. "Trends in the extraction of non-renewable resources: The case of fossil energy," Economic Modelling, Elsevier, vol. 37(C), pages 271-279.
    10. A. Marvasti, 2000. "Resource Characteristics, Extraction Costs, and Optimal Exploitation of Mineral Resources," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 17(4), pages 395-408, December.
    11. Elin Berg & Snorre Kverndokk & Knut Einar Rosendahl, 1999. "Optimal Oil Exploration under Climate Treaties," Discussion Papers 245, Statistics Norway, Research Department.
    12. Boyce, John R. & Vojtassak, Lucia, 2008. "An 'oil'igopoly theory of exploration," Resource and Energy Economics, Elsevier, vol. 30(3), pages 428-454, August.
    13. Toman, Michael & Krautkraemer, Jeffrey, 2003. "Fundamental Economics of Depletable Energy Supply," Discussion Papers dp-03-01, Resources For the Future.
    14. Cynthia Lin, C.-Y. & Wagner, Gernot, 2007. "Steady-state growth in a Hotelling model of resource extraction," Journal of Environmental Economics and Management, Elsevier, vol. 54(1), pages 68-83, July.
    15. Kirk Hamilton & Giles Atkinson, 2013. "Resource Discoveries, Learning and National Income Accounting," GRI Working Papers 117, Grantham Research Institute on Climate Change and the Environment.
    16. Mahadev Bhat & Ramachandra Bhatta, 2004. "Considering Aquacultural Externality in Coastal Land Allocation Decisions in India," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 29(1), pages 1-20, September.
    17. Jeffrey A. Krautkraemer, 1998. "Nonrenewable Resource Scarcity," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 2065-2107, December.
    18. Berg, Elin & Kverndokk, Snorre & Rosendahl, Knut Einar, 2002. "Oil Exploration under Climate Treaties," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 493-516, November.
    19. Steinbuks, Jevgenijs & Satija, Gaurav & Zhao, Fu, 2015. "Sustainability of solar electricity : the role of endogenous resource substitution and market mediated responses," Policy Research Working Paper Series 7178, The World Bank.
    20. repec:eee:resene:v:49:y:2017:i:c:p:218-232 is not listed on IDEAS
    21. Boyce, John R., 2003. "Exploration can cause falling non-renewable resource prices," Energy Economics, Elsevier, vol. 25(4), pages 339-343, July.
    22. Hartley, Peter & Medlock III, Kenneth B., 2008. "A model of the operation and development of a National Oil Company," Energy Economics, Elsevier, vol. 30(5), pages 2459-2485, September.
    23. Friedman, A., 2010. "Water-Saving Technology and Efficient Tariffs," Journal of the New Economic Association, New Economic Association, issue 8, pages 35-53.
    24. Tahvonen, Olli & Salo, Seppo, 2001. "Economic growth and transitions between renewable and nonrenewable energy resources," European Economic Review, Elsevier, vol. 45(8), pages 1379-1398, August.
    25. Cairns, Robert D. & Van Quyen, Nguyen, 1998. "Optimal Exploration for and Exploitation of Heterogeneous Mineral Deposits," Journal of Environmental Economics and Management, Elsevier, vol. 35(2), pages 164-189, March.

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