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On Two Folk Theorems Concerning the Extraction of Exhaustible Resources

Murray C. Kemp
Ngo Van Long

Abstract

Consider a closed economy with several deposits of an exhaustible resource, withthe marginal cost of extraction differing from deposit to deposit but constant for each deposit. It is widely believed that social optimality requires that deposits be exploited in strict sequence, beginning with the lowest cost deposit. It is shown that, in a general equilibrium context, with Ricardian techniques of extraction, the validity of the proposition depends on what is meant by constancy of cost. It is also believed that if there exists a high-cost substitute for the resources then the resource should be exhausted before production of the substitute is begun. It is shown that this proposition is false.