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From Hotelling to Backstop Technology

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Abstract

Hotelling's conceptual framework is expanded to incorporate the effects of a backstop technology on the planning horizon of the suppliers of an exhaustible resource and its price and quantity trajectories. It is shown that in the non-trivial case, the presence of a backstop technology shortens the planning horizon of the suppliers of the exhaustible resource in accordance with the resource suppliers' rate of time preference, backstop technology's rate of irnprovement and ratio of the initial resource spot price to the initial average production cost of the backstop substitute. As expected the presence of a backstop technology also lowers the spot prices of the exhaustible resource and accelerates its extraction and depletion. However, a decline of the initial average cost of producing the backstop substitute by a dollar leads to a decline of the exhaustible resource's initial spot price by less than a dollar.

Suggested Citation

  • Levy, A., 2000. "From Hotelling to Backstop Technology," Economics Working Papers wp00-04, School of Economics, University of Wollongong, NSW, Australia.
  • Handle: RePEc:uow:depec1:wp00-04
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    File URL: http://www.uow.edu.au/content/groups/public/@web/@commerce/@econ/documents/doc/uow012095.pdf
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    Cited by:

    1. Balázs Lengyel, 2010. "The Hungarian ICT sector – a comparative CEE perspective with special emphasis on structural change," EIIW Discussion paper disbei183, Universitätsbibliothek Wuppertal, University Library.

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    Keywords

    TECHNOLOGY ; PRICING ; ECONOMIC MODELS;

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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