IDEAS home Printed from https://ideas.repec.org/a/taf/apmtfi/v1y1994i1p87-108.html
   My bibliography  Save this article

Optimal pricing, use and exploration of uncertain natural resources

Author

Listed:
  • Patrick Hagan
  • Diana Woodward
  • Russel Caflisch
  • Joseph Keller

Abstract

We consider Arrow's model for an economy engaged in consuming a randomly distributed natural resource, and in exploring previously unexplored land to find more of the resource. After modifying the model so that each discovery reveals a random amount of the resource, we use dynamic programming techniques to derive the equations governing optimal rates of exploration, consumption, and pricing of the resource. We analyse these equations asymptotically when the typical amount discovered is small compared with the total amount of the resource, and approximately when the amount is medium or large. In both cases we obtain formulas for the optimal exploration, consumption, and pricing policies. We demonstrate the accuracy of these analytical results by comparing them with numerically-determined exact solutions, and discuss economic implications of these results.

Suggested Citation

  • Patrick Hagan & Diana Woodward & Russel Caflisch & Joseph Keller, 1994. "Optimal pricing, use and exploration of uncertain natural resources," Applied Mathematical Finance, Taylor & Francis Journals, vol. 1(1), pages 87-108.
    • Handle: RePEc:taf:apmtfi:v:1:y:1994:i:1:p:87-108
    DOI: 10.1080/13504869400000005
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/13504869400000005
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/13504869400000005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Harold Hotelling, 1931. "The Economics of Exhaustible Resources," Journal of Political Economy, University of Chicago Press, vol. 39(2), pages 137-137.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Michael Ludkovski & Xuwei Yang, 2017. "Mean Field Game Approach to Production and Exploration of Exhaustible Commodities," Papers 1710.05131, arXiv.org.
    2. Ivar Ekeland & Wolfram Schlenker & Peter Tankov & Brian Wright, 2022. "Optimal Exploration of an Exhaustible Resource with Stochastic Discoveries," Papers 2203.01614, arXiv.org.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Seiler, Volker, 2024. "The relationship between Chinese and FOB prices of rare earth elements – Evidence in the time and frequency domain," The Quarterly Review of Economics and Finance, Elsevier, vol. 95(C), pages 160-179.
    2. Dale W. Henderson & Stephen W. Salant, 1976. "Market anticipations, government policy, and the price of gold," International Finance Discussion Papers 81, Board of Governors of the Federal Reserve System (U.S.).
    3. John Baffes & Cristina Savescu, 2014. "Monetary conditions and metal prices," Applied Economics Letters, Taylor & Francis Journals, vol. 21(7), pages 447-452, May.
    4. Siebert, Horst, 1982. "Das intertemporale Angebot eines ressourcenabbauenden Unternehmens," Open Access Publications from Kiel Institute for the World Economy 3563, Kiel Institute for the World Economy (IfW Kiel).
    5. Paul Welfens & Jens Perret & Deniz Erdem, 2010. "Global economic sustainability indicator: analysis and policy options for the Copenhagen process," International Economics and Economic Policy, Springer, vol. 7(2), pages 153-185, August.
    6. Eduardo Ley & Molly K. Macauley & Stephen W. Salant, "undated". "Spatially and intertemporally efficient waste management: The costs of interstate flow control," Working Papers 97-07, FEDEA.
    7. Haugom, Erik & Mydland, Ørjan & Pichler, Alois, 2016. "Long term oil prices," Energy Economics, Elsevier, vol. 58(C), pages 84-94.
    8. Devarajan, Shantayanan & Fisher, Anthony C, 1981. "Hotelling's "Economics of Exhaustible Resources": Fifty Years Later," Journal of Economic Literature, American Economic Association, vol. 19(1), pages 65-73, March.
    9. Cai, Yiyong & Newth, David & Finnigan, John & Gunasekera, Don, 2015. "A hybrid energy-economy model for global integrated assessment of climate change, carbon mitigation and energy transformation," Applied Energy, Elsevier, vol. 148(C), pages 381-395.
    10. Pfeiffer, Lisa & Lin, C.-Y. Cynthia, 2012. "Groundwater pumping and spatial externalities in agriculture," Journal of Environmental Economics and Management, Elsevier, vol. 64(1), pages 16-30.
    11. Grimaud, Andre & Rouge, Luc, 2005. "Polluting non-renewable resources, innovation and growth: welfare and environmental policy," Resource and Energy Economics, Elsevier, vol. 27(2), pages 109-129, June.
    12. Seyhan, Demet & Weikard, Hans-Peter & van Ierland, Ekko, 2012. "An economic model of long-term phosphorus extraction and recycling," Resources, Conservation & Recycling, Elsevier, vol. 61(C), pages 103-108.
    13. Leach, Andrew & Mason, Charles F. & Veld, Klaas van ‘t, 2011. "Co-optimization of enhanced oil recovery and carbon sequestration," Resource and Energy Economics, Elsevier, vol. 33(4), pages 893-912.
    14. Mason, Charles F., 2014. "Uranium and nuclear power: The role of exploration information in framing public policy," Resource and Energy Economics, Elsevier, vol. 36(1), pages 49-63.
    15. Naoyuki Yoshino & Victoriia Alekhina, 2016. "Impact of oil price fluctuations on an energy-exporting economy: Evidence from Russia," Journal of Administrative and Business Studies, Professor Dr. Usman Raja, vol. 2(4), pages 156-166.
    16. Barhen, J. & Alsmiller, R.G. & Weisbin, C.R. & Morra, F. & Kuuskraa, V.A. & Nesbitt, D.M. & Philips, R.L. & Morra, F., 1983. "Design of a liquid fuels supply model for U.S. policy analysis," Energy, Elsevier, vol. 8(3), pages 169-197.
    17. Ansgar Belke & Daniel Gros, 2014. "A simple model of an oil based global savings glut—the “China factor”and the OPEC cartel," International Economics and Economic Policy, Springer, vol. 11(3), pages 413-430, September.
    18. Paltseva, Elena & Toews , Gerhard & Troya-Martinez, Marta, 2022. "I’ll pay you later: Sustaining Relationships under the Threat of Expropriation," SITE Working Paper Series 59, Stockholm School of Economics, Stockholm Institute of Transition Economics.
    19. Mardones, Cristian & del Rio, Ricardo, 2019. "Correction of Chilean GDP for natural capital depreciation and environmental degradation caused by copper mining," Resources Policy, Elsevier, vol. 60(C), pages 143-152.
    20. Julien Daubanes & Pierre Lasserre, 2019. "The supply of non-renewable resources," Canadian Journal of Economics, Canadian Economics Association, vol. 52(3), pages 1084-1111, August.

    More about this item

    Keywords

    optimal pricing; dynamic programming;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:apmtfi:v:1:y:1994:i:1:p:87-108. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAMF20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.