Abstract
Temporal discontinuities in public policy with respect to nonrenewable resource pricing can have significant impacts on the time patterns of resource extraction. These impacts arise from the effect of price discontinuities on the relative values of Hotelling rents across time periods. Whether faced with intertemporal price continuity or price discontinuity, the planning task of the wealth-maximizing producer is to equate the present value of each period's marginal contribution to the stream of net revenues from production across time. This rule for extraction provides the key to understanding the response to a price jump such as occurs upon the removal of price controls. The rational producer holds back at least some output until the price jump occurs. At the moment, the producer pushes output up sharply, raising marginal extraction cost by the absolute amount of the price jump and, thereby, maintaining the value of the Hotelling rent given by the gap between price and marginal extraction cost. US natural gas policy options, as well as plausible alternatives, are simulated to illustrate the effects of discontinuous regulatory regimes. 15 references, 1 table.
Published Version
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