The Under‐Exploitation of Natural Resources: A Model with Overlapping Generations

Murray Kemp and Ngo Long

The Economic Record, 1979, vol. 55, issue 3, 214-221

Abstract: It is well known that competitive markets may fail to generate an optimal rate of extraction of a natural resource‐stock. The barrier to optimality may be uncertainty about tenure, commonality of property rights in the resource, or uncertainty about the extent of the resource. In all these cases, suboptimality takes the form of over‐extraction. We draw attention to an additional source of suboptimality. In an economy with overlapping generations, the resource‐stock plays the double role of repository of savings and source of productive inputs. The decline in the supply of the resource‐stock may eventually force its price so high that it ceases to perform its second function. Extraction comes to an end even though the resource has a positive marginal productivity in producing consumption goods. This is inefficient, hence suboptimal. This time, however, suboptimality takes the form of under‐extraction.

Date: 1979
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