| Abstract: |
The purpose of this chapter is to provide an elementary introduction to the
nonrenewable resource model with multiple demand curves. The theoretical
literature following Hotelling (1931) assumed that all energy needs are
satisfied by one type of resource (e.g. "oil"), extractible at different
per-unit costs. This formulation implicitly assumes that all users are the
same distance from each resource pool, that all users are subject to the same
regulations, and that motorist users can switch as easily from liquid fossil
fuels to coal as electric utilities can. These assumptions imply, as
Herfindahl (1967) showed, that in competitive equilibrium all users will
exhaust a lower cost resource completely before beginning to extract a higher
cost resource: simultaneous extraction of different grades of oil or of oil
and coal should never occur. In trying to apply the single-demand curve model
during the last twenty years, several teams of authors have independently
found a need to generalize it to account for users differing in their (1)
location, (2) regulatory environment, or (3) resource needs. Each research
team found that Herndahl's strong, unrealistic conclusion disappears in the
generalized model; in its place, a weaker Herfindahl result emerges. Since
each research team focussed on a different application, however, it has not
always been clear that everyone has been describing the same generalized
model. Our goal is to integrate the findings of these teams and to exposit the
generalized model in a form which is easily accessible. |