Extraction Capacity and the Optimal Order of Extraction

UNCG Author/Contributor (non-UNCG co-authors, if there are any, appear on document)
Stephen P. Holland, Associate Professor (Creator)
Institution
The University of North Carolina at Greensboro (UNCG )
Web Site: http://library.uncg.edu/

Abstract: The least-cost-first extraction rule for deposits with different extraction costs previously has been shown to be invalid in general equilibrium. This paper demonstrates that this rule also does not hold in partial equilibrium when extraction capacity is limited. Necessary and sufficient conditions for several surprising extraction orders are presented. If extraction from a high-cost resource is constrained, it may be optimal to begin extraction from a high-cost deposit (or backstop) strictly before extracting from a lower-cost deposit. If extraction from a low-cost resource is limited, it may be optimal to exhaust a high-cost deposit strictly before the low-cost deposit is exhausted or to abandon extraction temporarily from a high-cost deposit and then to exhaust it later. The analysis demonstrates how extraction constraints affect the order of extraction and shows that certain cost reversals are caused by limited extraction capacity rather than by the general equilibrium definition of extraction costs.

Additional Information

Publication
Journal of Environmental Economics and Management 45(3) May, p. 569-588
Language: English
Date: 2003
Keywords
Natural resource extraction, Capacity constraints, Order of extraction, Cost reversals, Backstop