A Fallacy in the ANWR Drilling Debate: A Lesson on Scarcity Rents and Intertemporal Pricing under Different Market Structures

R. Morris Coats, Pecquet Gary and Shane Sanders

Journal of Industrial Organization Education, 2010, vol. 4, issue 1, 1-12

Abstract: It is common knowledge that oil discovered today, or that is newly allowed to be developed, has no effect on prices until reaching the market. However, economic theory does not support common knowledge on this issue. By lowering the value of holding oil for future sale, a future oil supply increase makes it more profitable for firms to produce and sell oil presently. Under three distinct market structures, we use a two-period model to show students that the resulting increase in present supply decreases the present price of oil. Production decisions in the absence of scarcity rents are also discussed.

Keywords: pricing; ANWR; depletable resource regulation; scarcity rents (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:bpj:jioedu:v:4:y:2010:i:1:n:2

DOI: 10.2202/1935-5041.1029

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