THE EFFICIENT USE OF MULTIPLE SOURCES OF A NONRENEWABLE RESOURCE UNDER SUPPLY COST UNCERTAINTY*

Abstract

Whereas in a deterministic world leaving a high-cost source of a nonrenewable resource untouched as long as a less costly source is available is always efficient, this may not be the case in a stochastic world. Conditions are derived under which it can be efficient to use a risky supply source in order to conserve a cheaper nonrisky source, or to use a costly nonrisky source while a less costly risky source is still available. A supply embargo can be interpreted as a limiting case; the nonrisky source can be reinterpreted as an artificial stockpile.