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Exploration and Exhaustible Resources: The Microfoundations of Aggregate Models

Joseph E. Swierzbinski and Robert Mendelsohn
International Economic Review
Vol. 30, No. 1 (Feb., 1989), pp. 175-186
DOI: 10.2307/2526556
Stable URL: http://www.jstor.org/stable/2526556
Page Count: 12
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Exploration and Exhaustible Resources: The Microfoundations of Aggregate Models
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Abstract

Starting from a disaggregate model of the search for low-cost deposits of an exhaustible resource, we derive the appropriate specifications for aggregate extraction and exploration cost functions and analyze the behavior of a competitive industry. The proper specification of the aggregate extraction cost function depends on the exploration technology and is generally different from the usual no-discovery specification. The common practice of combining the no-discovery cost function with exploration results in a misspecified model for which the total cost of extracting the resource is not well defined. The widely accepted prediction that the anticipated discovery of low-cost deposits can result in a U-shaped price path appears to be an artifact of this misspecification. For our properly specified cost functions, the predicted resource price is always rising, in spite of the continued discovery of low-cost deposits.

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