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Nonconvexity, Efficiency and Equilibrium in Exhaustible Resource Depletion

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  • Fisher, Anthony C.
  • Karp, Larry

Abstract

We reconsider the problem of inefficiency and nonexistence of a competitive equilibrium in exhaustible resource markets where extraction costs are nonconvex. The existence of a backstop technology (which induces a flat portion of the industry demand curve) restores both existence and efficiency, provided that the backstop price is sufficiently low. If firms face even a small amount of uncertainty regarding their rivals' stocks, a backstop technology is sufficient to restore existence of competitive equilibrium, even if the backstop price is very high. In this case, however, the competitive equilibrium is not efficient.

Suggested Citation

  • Fisher, Anthony C. & Karp, Larry, 1991. "Nonconvexity, Efficiency and Equilibrium in Exhaustible Resource Depletion," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt9hr4w60m, Department of Agricultural & Resource Economics, UC Berkeley.
    • Handle: RePEc:cdl:agrebk:qt9hr4w60m
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    1. Hartwick, John M. & Kemp, Murray C. & Van Long, Ngo, 1986. "Set-up costs and theory of exhaustible resources," Journal of Environmental Economics and Management, Elsevier, vol. 13(3), pages 212-224, September.
    2. Harold Hotelling, 1931. "The Economics of Exhaustible Resources," Journal of Political Economy, University of Chicago Press, vol. 39(2), pages 137-137.
    3. Richard J. Gilbert, 1979. "Optimal Depletion of an Uncertain Stock," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 46(1), pages 47-57.
    4. Eswaran, Mukesh & Lewis, Tracy R & Heaps, Terry, 1983. "On the Nonexistence of Market Equilibria in Exhaustible Resource Markets with Decreasing Costs," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 154-167, February.
    5. Schulze, William D., 1974. "The optimal use of non-renewable resources: The theory of extraction," Journal of Environmental Economics and Management, Elsevier, vol. 1(1), pages 53-73, May.
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