Department of Agricultural and Resource Economics

If average costs in a nonrenewable resource industry are U-shaped, a competitive equilibrium may not be optimal and, indeed, may not exist. Although the differential equation that describes the change in the rate of extraction is the same for planner and firm, the boundary conditions obtained from the transversality conditions for the respective problems (for planner and firm) will not, in general, be the same. If costs are convex, or if there exists a backstop technology which can produce the resource services at sufficiently low cost, the boundary conditions are, however, the same.