Edited by Robert Halvorsen and David F. Layton
The purpose of this chapter is to provide an elementary introduction to the nonrenewable resource model with multiple demands. The theoretical literature following Hotelling (1931) assumed that each grade of a resource can be shipped to users all over the world at the same cost; that all users are subject to the same taxes and regulations; and that motorists can switch as easily from liquid fossil fuels to coal as electric utilities can. As Herfindahl (1967) showed, these assumptions imply that in competitive equilibrium all users will exhaust a lower-cost resource completely before beginning to extract a higher-cost resource; moreover, users will switch to this higher-cost resource at the same moment, so simultaneous extraction of different grades of oil or of oil and coal will never occur. That is, Herfindahl’s conclusion about the order of extraction follows from his assumption of a single demand curve.
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