Optimal exploration and production of nonrenewable resources
Most studies of nonrenewable resource production and pricing assume there is a fixed reserve base to be exploited over time, but in fact, with economic incentives reserves can be increased. Here the reserve base is threated as the basis for production and exploratory activity as the means of increasing or maintaining reserves. ''Potential reserves'' are unlimited, but as depletion ensues, given amounts of exploratory activity result in ever smaller discoveries. Given these constraints, resource producers must simultaneously determine their optimal rates of exploratory activity and production. This problem is solved for competitive and monopolistic markets, and it is shown that if the initial reserve endowment is small, the price profile will be U-shaped; at first production will increase as reserves are developed, and later production will decline as both exploratory activity and the discovery rate fall.
- Research Organization:
- Massachusetts Inst. of Tech., Cambridge
- OSTI ID:
- 6445573
- Journal Information:
- J. Polit. Econ.; (United States), Journal Name: J. Polit. Econ.; (United States) Vol. 86:5; ISSN JLPEA
- Country of Publication:
- United States
- Language:
- English
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