Price and extraction path over time, Public Economics

Assignment Help:

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


Related Discussions:- Price and extraction path over time

Cost-based methods, Normal 0 false false false EN-IN ...

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

Contingent ranking method, Normal 0 false false false E...

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

Theory of environmental policy, Normal 0 false false false ...

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

Emerging issues affecting the role of government, Probelm 1: (a) What ...

Probelm 1: (a) What are the main roles of Government in the economic development of a country? (b) What are some of the emerging issues affecting the role of Government?

Graphthe market for water park business, Graphthe market for water park bus...

Graphthe market for water park business, labeling the demand curve, the social-value curve, the market equilibrium level of output, and the efficient level of output. What is the p

Role of government intervention in the economy, For a very large part of 20...

For a very large part of 20 th century, we may recall, there existed capitalist market-oriented economies and socialist planning-oriented economies. 21stcentury is however witness

Uncertainties of the future and heterogeneity of agents, Introduce uncertai...

Introduce uncertainties in attainments of policy outcomes, winning of elections, optimistic and pessimistic expectations of agents and relate it to various adjustments and converge

Economic of labour market, What is the link between efficiency wages and sh...

What is the link between efficiency wages and shirking? There are two firms A and B identical in all respects except the following. In firm A increased expenditure on monitoring co

Principles of multi unit finance, what are principles of multi unit finance...

what are principles of multi unit finance and fiscal federalism in India

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd