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Optimal Subsidy for Investment in Extraction Technology in a Small Open Economy with a Non-renewable Natural Resource

Author

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  • Kamil Aliyev

    (Graduate School of Economics, Osaka University)

Abstract

We develop a small open economy model with non-renewable natural resource, where firms can improve the extraction technology by investment. We analytically derive the equilibrium investment in extraction technology and then derive the equilibrium duration of non-renewable resource extraction. We show that a subsidy for investment in extraction technology promotes the investment and extends the duration. Moreover, we assume that the subsidy is financed by the income tax, and examine the effect of the investment subsidy. As a result, the higher the share of natural resource earnings in total output, the weaker the positive effect of subsidy on the duration is. The optimal subsidy which maximizes the profit from natural resource sales is lower as the ratio of resource sales to non-resource output is higher.

Suggested Citation

  • Kamil Aliyev, 2023. "Optimal Subsidy for Investment in Extraction Technology in a Small Open Economy with a Non-renewable Natural Resource," Discussion Papers in Economics and Business 23-12, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:2312
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    More about this item

    Keywords

    non-renewable natural resource; small open economy; optimal subsidy;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development

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