chapter  3
28 Pages

A RESOURCE EXTRACTION INDUSTRY

In the competitive industry there are many price taking firms, each with some small holding of resource of stock to extract, and each correctly projecting what industry prices must be into the future. The firms are price takers in the sense they were in the analysis of the firm above but output price emerges endogenously as each firm selects its quantity to extract period by period. With each firm optimizing intertemporally, it is as if a planner were maximizing the discounted social surplus in the market as a whole. Social surplus in a period is the sum of consumer surplus and producer surplus and dynamic rent. This permits us to analyze the competitive industry as if a benevolent planner were optimizing. This simplifies matters somewhat but we still keep in mind that the industry comprises many small resource extracting firms.