Economics of resource supplementation: the development of an ethanol fuel industry
Technological supplementation is introduced into the intertemporal resource allocation problem. Supplementation allows a renewable resource to be partially substituted for a nonrenewable resource in a fixed production. The reduced input quantity of the nonrenewable in the end product increases its uselife. There is an inverse relationship between the supplementation date and uselife. Using the ethanol fuel industry as an example, supplementation benefits take three forms: (1) the uselife of petroleum to produce gasoline is increased; (2) when petroleum's exponentially growing price exceeds ethanol's constant price, refiners earn an economic profit by pricing fuel at petroleum's opportunity cost; and (3) a harmful externality is reduced as ethanol replaces lead in gasoline. The private switch point occurs when a relative price advantage exists. However, this may not be the optimal switch point. Supplementation prior to the private switch will require a subsidy equal to the input price differential. A unique level of production capacity is required for the optimal switch point. Capacity development requires identification of an investment path. Attempts to compress the investment interval will increase total capacity cost per unit, the final price of ethanol, and hence, the total subsidy cost for any switch point.
- Research Organization:
- Utah Univ., Salt Lake City (USA)
- OSTI ID:
- 6564265
- Resource Relation:
- Other Information: Thesis (Ph. D.)
- Country of Publication:
- United States
- Language:
- English
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