On Equilibrium in Resource Markets with Scale Economies and Stochastic Prices

Charles Mason

No 73, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: I consider a non-renewable resource market where extraction costs are non-convex and market price is subject to stochastic shocks. While competitive equilibrium cannot exist if costs are non-convex and demand is deterministic, equilibrium can be supported in the context of stochastic demand. The crucial distinction is that the noisy environment can create an incentive for firms to hold inventories. Inventories allow firms to continue producing at a smooth pace at any instant when extraction ceases, e.g. when reserves are exhausted. Accordingly, there are no abrupt changes in the expected price path, in contrast to the deterministic variant of the model.

Keywords: Resource Economics; Stochastic Dynamic Optimization (search for similar items in EconPapers)
JEL-codes: D8 L15 Q2 (search for similar items in EconPapers)
Date: 2011-11-17
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: On equilibrium in resource markets with scale economies and stochastic prices (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:oxf:oxcrwp:073

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