Optimal Pricing, Use, and Exploration of Uncertain Natural Resource Stocks
The classic Hotelling (Ref. 1) model of exploitation of exhaustible resources assumes in its simplest form that the stock of the resource is known from the beginning. If there are no extraction costs, then the shadow prices associated with an optimal extraction policy rise at the rate of the market rate of interest. The only variable that has to be determined is the initial price, which then determines all future prices; the initial price depends on the interaction of demand (or utility) considerations with the initial stock. In a competitive world, prices would clearly have to rise at the rate of interest to keep resource holders indifferent between extracting the resource now and later.
KeywordsOptimal Policy Shadow Price Unexplored Area Extraction Cost Initial Price
Unable to display preview. Download preview PDF.
- 2.Crabbe, P., L’Exploration des ressources extractives non renouvelables: Théorie économique, processus stochastique et vérification, L’Actualité Économique, Montreal, Canada, pp. 559–586, October—November 1977.Google Scholar
- 6.Deshmukh, S. D. and PLISKA, S. R., Optimal Consumption and Exploration of Nonrenewable Resources under Uncertainty, Discussion Paper No. 317, Center for Mathematical Studies in Economics and Management Science, Northwestern University, 1978.Google Scholar
- 7.Menard, H. W. and Sharman, G., Scientific uses of random drilling models, Science, Vol. 190, pp. 337–343, 1975.Google Scholar
- 8.Karlin, S. and Taylor, H. M., A First Course in Stochastic Processes, 2d ed., Academic Press, New York, San Francisco, and London, 1975.Google Scholar
- 9.Bellman, R. and Dreyfus, S., Applied Dynamic Programming, Princeton University Press, Princeton, N.J., 1962.Google Scholar