Price and extraction path over time, Public Economics

Price and Extraction Path over Time

It is obvious that the industry would reduce quantity extracted over time in order to obtain higher prices, i.e., net price must go up over time. The price can go up until a point at which no one is willing to buy the product. This is the 'choke price', i.e., the price at which the demand for commodity is zero. At this point, either the substitute product or the substitute technology will start operating at a lower cost.

This is called 'backstop technology'. Hence, if there is any stock left on the ground when the price hits the choke price, then it is a waste for the owner because the leftover can never be sold at that price. Therefore, the resource owners will want to deplete their resources completely when the choke price is reached. This extraction path will indicate the time path of price.

665_Price and Extraction Path over Time.png

Figure :  Price Path

In the below diagram, the optimal price and extraction paths have been compared with non-optimal paths represented by slower and faster extraction rates as compared to the optimal rate. In below diagrams inefficient extraction and price paths are compared with the efficient path A. Path B illustrates extraction that is too fast relative to the efficient path. More is extracted in each time period under path B. Mineral reserves are depleted before the choke price is reached if path B is followed. Path C illustrates extraction that is too slow relative to the efficient path. The choke price is reached before the mineral reserves are depleted. Therefore, paths B and C are inefficient.


1055_Price and Extraction Path over Time 2.png

Figure :  Extraction Path

Posted Date: 12/19/2012 12:12:38 AM | Location : United States

Related Discussions:- Price and extraction path over time, Assignment Help, Ask Question on Price and extraction path over time, Get Answer, Expert's Help, Price and extraction path over time Discussions

Write discussion on Price and extraction path over time
Your posts are moderated
Related Questions
Flaws in Conventional System - Representation Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplore

why is public finance important?

Mr. X enters into a contract with Mr. Z under which Z agreed to build a customized telescope for X for $500. The value of the completed telescope to X will be $600. Expecting that

How has public policy helped to shape the way that urban Americans have spent their leisure time throughout the period that we have examined in class? Have such policies hindered a

The purpose of this assignment is to provide you an opportunity to enhance your skills related to use of APA format to cite references and selection of research articles most relev

What are the properties and limitations of GDP as a social welfare function?

Explain the stages and various coordination mechanisms involved in policy processes. Discuss various factors that influenced the agenda setting in policy processes.

Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

Q. Example on Uncertainty and the policy process? For example, if it is expected that current government will be replaced in upcoming election, and the next government will be