Nonconvexity, Efficiency and Equilibrium in Exhaustible Resource Depletion
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.
|Date of creation:||01 Nov 1991|
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- 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 154-67, February.
- John Hartwick & Murray Kemp & Ngo van Long, 1980.
"Set-up Costs and Theory of Exhaustible Resources,"
412, Queen's University, Department of Economics.
- 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.
- Richard J. Gilbert, 1979. "Optimal Depletion of an Uncertain Stock," Review of Economic Studies, Oxford University Press, vol. 46(1), pages 47-57.
- Farrow, Scott, 1985. "Testing the Efficiency of Extraction from a Stock Resource," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 452-87, June.
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