chapter  1
6 Pages

INTRODUCTION

This survey of theoretical investigations into what economic “forces” determine the rate of using up of stocks of exhaustible resources and the rate of discovery of new stocks relies on a few key ideas in economics. In other words what follows are variations on a few standard themes. This arises because we make much use of the paradigm of decision makers optimizing over time. Conditions characterizing optimal solutions of intertemporal optimizing have become fairly well known, certainly since the 1960’s. Much of what we discuss deals with decision makers optimizing in relatively easily delineated environments. Complications abound when the environ­ ment being dealt with involves subtle strategic interactions with competitors, a dynamic game theoretic environment. We touch on such environments when we discuss oligopoly and exploration but for the most part deal with simpler environments in which strategic interactions among extractors are not complicated. The key ideas we make use of are zero profit arbitrage conditions across time periods. These are basic optimality conditions for intertemporal profit maximization. Resource stock owners cannot expect to make more or less profit over time than agents who tie up the same capital in other investment opportunities of a similar risk class. Unfortunately tests of whether the data support these basic condi­ tions are not conclusive. Data are difficult to obtain in a form which makes a test straightforward. Actual markets are rife with many forms of uncertainty which enter into the zero profit intertemporal arbitrage conditions in complicated ways. We introduce many of these uncertainties into our modeling but only one at a time, in a

serial not simultaneous approach. We do not report on the varied attempts that have been made to test whether actual extraction paths appear to be generated by some of the less elaborate intertemporal optimization procedures ascribed to representative decision makers. Despite progress to date in this area, more statifactory results can be expected in the near future.1