Department of Agricultural and Resource Economics
Nonconvexity, Efficiency and Equilibrium in Exhaustible Resource Depletion
- Author(s): Fisher, Anthony C.
- Karp, Larry
- et al.
Abstract: We reconsider the problem of inefficiency and nonexistence of a competitive equilibrium in exhaustible resource markets where extraction costs are nonconvex. The existence of a backstop technology (which induces a flat portion of the industry demand curve) restores both existence and efficiency, provided that the backstop price is sufficiently low. If firms face even a small amount of uncertainty regarding their rivals' stocks, a backstop technology is sufficient to restore existence of competitive equilibrium, even if the backstop price is very high. In this case, however, the competitive equilibrium is not efficient.