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Incentive Compatible Extraction of Natural Resource Rent

Author

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  • Cornelia Luchsinger

    () (Center for Energy Policy and Economics CEPE, Department of Management, Technology and Economics, ETH Zurich, Switzerland)

  • Adrian Müller

    () (Center for Energy Policy and Economics CEPE, Department of Management, Technology and Economics, ETH Zurich, Switzerland)

Abstract

The exploitation of natural resources often generates considerable economic rent. Since such so-called resource rents accrue due to innate characteristics of the resource itself thus reflecting its eco-nomic value and not due to managerial abilities of the exploiting firm, at least part of it should - as a price for the use of the resource – be collected by the owner of the resource, which is often the gov-ernment. As the owner of the resource faces a classical principal-agent problem, the incentives to exploit a resource efficiently should be taken into account when setting up a rent extraction scheme. We pre-sent a formalism that unifies different existing approaches to such schemes and address issues such as asymmetric information, risk aversion, and uncertainty. Finally, we discuss the feasibility to base a rent extraction scheme on such a formalism and point out its main problems. The most important ones are the presence of intrinsically unobservable and very uncertain values and the high complexity of the formalism. There are mainly two possibilities to deal with these problems: either to make additional as-sumptions and to set boundary conditions such as to solve the problem in a simplified setting, as much of the literature does, or to refrain from solving it, and instead use it as a general guiding principle, which helps to avoid gross errors and shows the broad direction, but leaves the concrete implementa-tion rather to a political process than to an economic analysis.

Suggested Citation

  • Cornelia Luchsinger & Adrian Müller, 2003. "Incentive Compatible Extraction of Natural Resource Rent," CEPE Working paper series 03-21, CEPE Center for Energy Policy and Economics, ETH Zurich.
  • Handle: RePEc:cee:wpcepe:03-21
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    File URL: http://www.cepe.ethz.ch/publications/workingPapers/CEPE_WP21.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Reinhard Madlener & Stefan Vögtli, 2006. "Diffusion of bioenergy in urban areas: socio-economic analysis of the planned Swiss wood-fired cogeneration plant in Basel," CEPE Working paper series 06-53, CEPE Center for Energy Policy and Economics, ETH Zurich.
    2. Silvia Banfi & Massimo Filippini & Andrea Horehájová, 2007. "Hedonic Price Functions for Zurich and Lugano with Special Focus on Electrosmog," CEPE Working paper series 07-57, CEPE Center for Energy Policy and Economics, ETH Zurich.
    3. Madlener, Reinhard & Koller, Martin, 2007. "Economic and CO2 mitigation impacts of promoting biomass heating systems: An input-output study for Vorarlberg, Austria," Energy Policy, Elsevier, vol. 35(12), pages 6021-6035, December.
    4. Silvia Banfi & Massimo Filippini & Andrea Horehájová, 2007. "Using a Choice Experiment to Estimate the Benefits of a Reduction of Externalities in Urban Areas with Special Focus on Electrosmog," CEPE Working paper series 07-58, CEPE Center for Energy Policy and Economics, ETH Zurich.
    5. Reinhard Madlener & Carlos Henggeler Antunes & Luis C. Dias, 2006. "Multi-Criteria versus Data Envelopment Analysis for Assessing the Performance of Biogas Plants," CEPE Working paper series 06-49, CEPE Center for Energy Policy and Economics, ETH Zurich.
    6. Kumbaroglu, Gürkan & Madlener, Reinhard & Demirel, Mustafa, 2008. "A real options evaluation model for the diffusion prospects of new renewable power generation technologies," Energy Economics, Elsevier, vol. 30(4), pages 1882-1908, July.
    7. Eberhard Jochem, 2005. "An Agenda for Energy and Material Efficiency Policy – An Element of Technology Policy for a More Sustainable Use of Natural Resources," CEPE Working paper series 05-40, CEPE Center for Energy Policy and Economics, ETH Zurich.
    8. Reinhard Madlener & Carmenza Robledo & Bart Muys & Bo Hektor & Julije Domac, 2003. "A Sustainability Framework for Enhancing the Long-Term Success of LULUCF Projects," CEPE Working paper series 03-29, CEPE Center for Energy Policy and Economics, ETH Zurich.

    More about this item

    Keywords

    natural resource rent; incentives; rent extraction; regulation;

    JEL classification:

    • Q00 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - General
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • R52 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Land Use and Other Regulations
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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