Monopoly and the rate of extraction of exhaustible resources: Note

Journal Article · Thu Mar 01 04:00:00 EST 1979 · Am. Econ. Rev.; (United States)

OSTI ID:5778822

Lewis, T R ^[1]; Matthews, S A; Burness, H S

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1. Univ. of Arizona, Tucson

Joseph Stiglitz has demonstrated (Am. Econ. Rev.; 66: 655-661(Sep 1976)) a set of familiar conditions under which a monopoly-owned nonreplenishable resource will tend to be exhausted at a slower rate than is socially optimal. This supports earlier views on the subject expressed by Harold Hotelling and Robert Solow. Stiglitz shows under the natural first-approximation assumptions of stationary, iso-elastic demand and zero extraction costs, that monopolistic and socially optimal (competitive) extraction rates are identical. If demand elasticity increases with time or constant unit production costs are positive but possibly decrease with time, he shows that competitive extraction rates exceed monopolistic rates for at least an initial period of time. In this note, realistic, alternative extensions to the iso-elastic, zero cost analysis which tend to bias monopolistic extraction rates in the opposite direction are presented, i.e., towards excessive resource use. The first modification allows for costs that do not vary with extraction rate. Occurring in the form of leasing fees, capital costs, and maintenance fees, these quasi-fixed costs are incurred only during periods of production and often constitute a substantial portion of operating expenses. The second extension involves demand elasticities varying with consumption instead of time. Particularly considered is a stationary demandschedule with elasticity increasing in consumption. In general, competitive ownership of the resource will also result in socially non-optimal production when fixed operation costs exist. (MCW)

• OSTI ID: 5778822
• Journal Information: Am. Econ. Rev.; (United States), Journal Name: Am. Econ. Rev.; (United States) Vol. 69:1; ISSN AERNA
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
290200 -- Energy Planning & Policy-- Economics & Sociology
290400* -- Energy Planning & Policy-- Energy Resources
COMPETITION
DEMAND FACTORS
ENERGY SOURCES
INTEREST RATE
LEASING
MAINTENANCE
MONOPOLIES
OWNERSHIP
RESOURCE DEPLETION
SOCIAL IMPACT
TIME DEPENDENCE