Heterogeneous Demand and Order of Resource Extraction

• Published in: Econometrica Vol. 62; no. 6; pp. 1445 - 1452
• Main Authors: Chakravorty, Ujjayant, Krulce, Darrell L.
• Format: Journal Article
• Language: English
• Published: Malden, MA Econometric Society 01.11.1994; Blackwell; George Banta Pub. Co. for the Econometric Society; Blackwell Publishing Ltd
• Subjects: Applications; Applied sciences; Coal; Cost efficiency; Costs; Demand; Economic models; Economic resources; Economic theory; Electrical phases; Electricity; Energy; Energy economics; Energy resources; Equilibrium models; Exact sciences and technology; Extraction costs; General, economic and professional studies; Methodology; Methodology. Modelling; Natural resources; Notes and Comments; Studies; Transportation; Transportation demand; Optimal strategy; Coal; Production; Electric energy; Econometric model; Transport; Petroleum
• ISSN: 0012-9682; 1468-0262
• DOI: 10.2307/2951755

Standard models of resource extraction assume that quality differences between resource grades can be completely characterized by cost. An analysis formulates a model of 2 resources that have a quality difference that cannot be characterized independently of demand. For illustrative purposes, oil and coal are chosen as the 2 resources. The model assumes that there is no quality difference between these 2 resources when used to produce electricity but there is a significant quality difference if used for transportation. The analysis characterizes the optimal solution to this 2-resource, 2-demand problem and proves the existence of 3 distinct phases of resource extraction. In the first phase, the cheaper oil is extracted for both electricity and transportation. This is followed by the 2nd phase, in which oil is extracted for transportation but coal is extracted for electricity. In the 3rd phase, oil is exhausted, and coal is extracted for both electricity and transportation.