Monopoly and the Rate of Extraction of Exhaustible Resources.pdf

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In some recent discussions of the “energy

crisis,” the suggestion has been put forward

that the oil producing countries or the oil

companies have been acting collusively and

have forced the price of oil to a level far

higher than it would have been in competi-

tive equilibrium. The object of this paper is

to compare the rate of exploitation of an

exhaustible natural resource in competitive

markets with that of a profit maximizing

monopolist. The basic result of my analysis

is that there is a very limited scope for the

monopolist to exercise his monopoly power;

indeed, under the natural “first approxima-

tion” of constant elasticity demand sched-

ules, with zero extraction costs, monopoly

prices and competitive equilibrium prices

will in fact be identical. In other cases there

is some tendency for a monopolist to be more

“conservation minded” than a competitive

market would be.