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Fundamental Economics of Depletable Energy Supply - page 17 / 30





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Resources for the Future

Krautkraemer and Toman

increase or decrease the marginal value of new discoveries compared to a situation of the same average conditions with no uncertainty.

5. Market Failures and Distortions

Assessing the effects of various market failures and distortions on depletable energy supply is complicated by the inherently intertemporal nature of these resources. Whether a market imperfection results in depletion that is more or less rapid or extensive than the socially efficient depletion rate or volume depends upon how the distortions change over time and interact with dynamic changes in resource scarcity signaled by the extraction and exploration user costs.

For example, a monopolist would want to restrict output to raise price and increase returns. This would mean a lower cost of extraction in the future compared to a competitive industry facing the same demand conditions and extracting more quickly. (In actuality, demand conditions themselves would change in response to the higher monopoly prices, as energy users adapted to more energy-efficient and alternative-energy technologies.) This in turn would encourage more output. Nevertheless, the monopolist could restrict output over time in such a way that the cumulative depletion of the resource (and cumulative development of new resources over time) was less than under competition. This is a different prediction than the one obtained from a simple model with fixed homogeneous reserves.

Government interventions also can tilt the market's depletion path toward the present or the future. Energy resource industries are subject to a variety of taxes in addition to the taxes paid by firms generally. One motivation for depletable resource taxation is that depletable natural resources like fossil energy are part of the national heritage and resource rents should accrue to the general welfare. Depletable energy resources can be subject to severance taxes per unit extracted or royalty payments as a percentage of the resource price. In general, the effect of such a tax on the intertemporal extraction pattern depends on how the present value of the tax changes over time as well as on the magnitudes of depletion effects in the cost structure.

For example, the present value of a constant severance tax decreases over time and so shifts extraction from the present to the future. However, the tax still reduces net returns in any period compared to a no-tax alternative, thereby reducing the contemporaneous incentive to extract.


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