Production and Investment in Natural Resource Industries.

Abstract

There has been a recent tendency for economists to view natural resource scarcity as a diminishing threat to man's existence and his ability to produce an abundant supply of worldly goods (see John V. Krutilla). This change in view has emanated from the world's experience of the last few decades with technological development, and the absence of any evidence that this rapid accumulation of technical knowledge will cease. In some respects, one might think that modern technology has removed the need for an economic theory of conservation (temporal allocation) of natural resources. On the other hand, conservation of natural resources can now be looked upon with less emotion since the dire consequences of too rapid exploitation are no longer a threat. The question of conservation is thus a cold economic problem removed from many of its older value connotations. There is indeed, considerable effort taking place in the economics profession to fill this need for a quantitative economic theory of conservation; however, with one exception (Vernon Smith), focus has been limited to specific resources. Earlier works by Lewis C. Gray and Harold Hotelling concerning the Theory of the Mine have recently been extended in numerous papers (see R. Cummings and 0. Burt, Richard L. Gordon, Anthony Scott 1967). Problems associated with petroleum production are considered in Paul Davidson, and the fishery is considered in J. A. Crutchfield and Arnold Zellner, H. Scott Gordon, James Quirk and Vernon Smith, Anthony Scott (1955), and Ralph Turvey. An extensive literature exists on the temporal allocation of groundwater; two recent contributions are Gardner Brown and Charles B. McGuire, and Burt.' A logical problem has been encountered, however, in efforts to examine the optimum allocation of a natural resource over time without explicitly considering the rate of investment associated with resource use. This difficulty stems from the long life of many capital items used in the process of exploiting the natural resource. Earlier studies have either tacitly or explicitly amortized costs of investment associated with resource use and proceeded as though all costs of production were essentially variable. Smith was the first to explicitly bring capital investment into a production model for natural resources, and his work was followed by the authors where only exhaustible resources were considered. More recently, Quirk and Smith have introduced a dynamic model of the fishery in which capital investment is treated explicitly. It seems then that there is a need for a comprehensive model for simultaneously optimizing the rate of resource use and investment in natural resource industries