Existence of Equilibria in Exhaustible Resource Markets with Economies of Scale and Inventories

44 Pages Posted: 24 Aug 2014 Last revised: 19 Jan 2015

See all articles by Antoine Bommier

Antoine Bommier

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Lucas Bretschger

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Francois Le Grand

ESC Rennes School of Business

Date Written: August 22, 2014

Abstract

The paper proves the existence of equilibrium in nonrenewable resource markets when extraction costs are non-convex and resource storage is possible. Inventories flatten the consumption path and eliminate price jumps at the end of the extraction period. Market equilibrium becomes then possible, contradicting previous claims from Eswaran, Lewis and Heaps (1983). We distinguish between two types of solutions, one with immediate and one with delayed build-up of inventories. For both cases we do not only characterize potential optimal paths but also show that equilibria actually exist under fairly general conditions. It is found that optimum resource extraction involves increasing quantities over a period of time. What is generally interpreted as an indicator of increasing resource abundance is thus perfectly compatible with constant resource stocks.

Keywords: Exhaustible resources, nonconvex extraction cost, equilibrium existence, resource storage.

JEL Classification: Q30, C62, D92, D41.

Suggested Citation

Bommier, Antoine and Bretschger, Lucas and Le Grand, François, Existence of Equilibria in Exhaustible Resource Markets with Economies of Scale and Inventories (August 22, 2014). Available at SSRN: https://ssrn.com/abstract=2485214 or http://dx.doi.org/10.2139/ssrn.2485214

Antoine Bommier

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

Lucas Bretschger (Contact Author)

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

François Le Grand

ESC Rennes School of Business ( email )

Rue Robert d'arbrissel, 2
Rennes, 35000
France

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