Exhaustible resources: the theory of optimal depletion

Abstract

Introduction Are our exhaustible energy resources being depleted too rapidly? Or are they perhaps being depleted too slowly as a consequence of efforts by producing nations and large corporations to restrict output and thus raise prices? Questions like these, which have been given new urgency by the energy crisis of recent years, lead quite naturally to an inquiry into what constitutes optimal use of exhaustible resources. A fairly standard approach in such an inquiry, and the one taken here, is first to derive the conditions that characterize socially efficient resource use and then determine to what extent these are also realized in a competitive equilibrium. In other words, does the fundamental theorem of welfare economics continue to hold in the context of exhaustible resources? As the question about the large energy producers implies, all sorts of imperfections are known to interfere with the tendency of a system of competitive markets to allocate resources efficiently. Thus, even if it turns out that a competitive equilibrium is efficient, one still must consider the effects of relevant imperfections, or market failures. For example: What about monopoly? What about the environmental disruption that often accompanies the extraction, conversion, and use of exhaustible resources? Further, as will be argued later in this chapter, there may be other kinds of market failures peculiar to these resources, involving such things as the uncertainty that surrounds their discovery and the long-lasting effects of current decisions about their use.