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Optimal Extraction and Taxation of Strategic Natural Resources: A Differential Game Approach

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  • Moustapha Pemy

Abstract

This paper studies the optimal extraction and taxation of nonrenewable natural resources. It is well known that the market values of the main strategic resources such as oil, natural gas, uranium, copper,..., etc, fluctuate randomly following global and seasonal macroeconomic parameters, these values are modeled using Markov switching L\'evy processes. We formulate this problem as a differential game. The two players of this differential game are the mining company whose aim is to maximize the revenues generated from its extracting activities and the government agency in charge of regulating and taxing natural resources. We prove the existence of a Nash equilibrium. The corresponding Hamilton Jacobi Isaacs equations are completely solved and the value functions as well as the optimal extraction and taxation rates are derived in closed-form. A Numerical example is presented to illustrate our findings.

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  • Moustapha Pemy, 2016. "Optimal Extraction and Taxation of Strategic Natural Resources: A Differential Game Approach," Papers 1611.02547, arXiv.org, revised Jun 2018.
    • Handle: RePEc:arx:papers:1611.02547
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    1. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
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    3. Donald A. Hanson, 1980. "Increasing Extraction Costs and Resource Prices: Some Further Results," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 335-342, Spring.
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