A survey of the literature on the economics of natural resources. Extractive resources are classified as renewable or non-renewable, depending on whether they exhibit economically significant rates of regeneration. A unified model of optimal extraction over time is developed, drawing on a number of contributions to the literature. Special features are developed for the renewable and non-renewable cases, and extensions and applications are noted, as well as needs for further research. Policy issues are treated, chief among these being the extent to which the market can be trusted to generate the right rate of extraction. Finally the empirical evidence is reviewed on whether we are running out of extractive resources.
Most of the literature devoted to the "theory of the mine" has been developed under certainty. It has been unable to explain the activity of exploration. The stochastic models of exploration were developed quasi-independently from economic theory. The purpose of this article is to survey both the mining and economic literature related to the "theory of the mine" under uncertainty and the exploration models since the turn of the century. The survey is complementary to the one made in this journal by F. Peterson and A.C. Fisher.
The first part defines exploration as being essentially a search and information gathering activity. It reviews the contributions to the economic theory of exploration and resource stock uncertainty. It compares the optimal extraction path and the life cycle of the mine under stock uncertainty and stock certainty. It shows in particular that increasing the rate of discount is generally inappropriate to take account of stock uncertainty. Some partial equilibrium results on exploration are given as well. The presence of stock uncertainty or exploration in a general equilibrium model is shown to jeopardize the optimality of competitive allocations.
The second part points out the wealth of the theoretical and empirical analysis of exploration as a stochastic process. It first reviews the literature on size distributions of reserves which gives strong theoretical and empirical support to the lognormal hypothesis. It then goes on to the exploration models which roughly speaking can be broken down into two groups. The Allais type models, better suited for relatively unexplored regions, which combine a Poisson or negative binomial process for discovery with a lognormal distribution for sizes. The Arps-Roberts-Kaufman type models, more adequate for "mature" regions, assume exhaustive sampling with probability proportional to size of discovery. Generally the treatment of the discovery process, to be distinguished from the sampling for sizes, and the handling of geological information are still woefully inadequate.
The third and last part of the survey points out the gap which exists in the microeconomic literature about the study of random inputs. It suggests that the theory of dams and insurance and the theory of search especially adaptive search could be fruitfully used. Problems which remain to be tackled are the influence of stock uncertainty on grade of ore mined and on investment in capacity.
One particular problem with the competitive solution to resource pricing is the potential for resource price instability. Using monthly data on prices for five different minerals the author examines, with the help of statistical techniques, the behaviour of prices over the years 1922-1974. He finds that fears of potential resource price instability have been overstated. Due either to the capitalization reactions of resource owners, or to the fact that resource markets are characterized by a monopolized industrial structure, real resource prices appear to show remarkable stability.
Use efficiency of the various forms of energy are essential parameters in the determination of useful energy consumption. Some authors (Adams and Miovic) have attempted to determine these by using econometric models instead of direct, and essentially technical, measurement. The paper presents this last method and insists on the fact that a correct determination of use efficiency requires that we distinguish between fossil fuels and electricity. Some results concerning the rate of substitution between the different forms of energy are provided.
A discussion of the main controversies over the tax treatment of the natural resource industries, of optimal taxation in relation to various policy objectives, and of the possibility of attaining these objectives through the main forms of taxation and royalties now in existence.
Vertical integration occurs when a transaction between two consecutive stages of production is carried through an internal organisation rather than the market. For most mineral products that are found in Canada, we can observe a fairly high degree of vertical integration from exploration up to refining. The purpose of this paper is to review the various approaches that have been used to study vertical integration in economic analysis and to evaluate their applicability to the Canadian mining sector. Thus far economists have approched vertical integration from three different stand points: first, the efficiency of interval organisation relative to the market in dealing with uncertainty under certain circumstances; second, the capacity to extend market power through vertical integration, and third, vertical integration can arise as an adjustment to some institutional constraints resulting mostly from government interventions. Although the efficiency and the monopolistic argument have contributed to vertical integration in the Canadian mining sector, government intervention in the form of special tax rules have also played a major role.
What is the appropriate economic policy for primary commodity producing developing countries given that industrialized countries are specialized in the production of technological progress? Integrating the concept of product life cycle to the static theory of comparative advantage, Harry Johnson has argued that free trade will, by spreading the technology, dissolve the monopoly in technology, and thus constitutes the only policy capable of transmitting growth from one country to another. This article criticizes this thesis on the following points: 1) A rigorous interpretation of the concept of product life cycle and of the underlying assumptions suggests that only industrialized countries present the necessary conditions for the location of the production of exportable technological progress. 2) It follows that the monopoly of the industrialized countries is not temporary but dynamic and self renewing. 3) Free trade, in this case, will only reinforce the negative effects of this monopoly on international specialization and, therefore, reinforce the disparities between industrialized and developing countries. Given the absence of a supranational authority which could intervene against this monopoly, it is appropriate to consider the limits of the bilateral monopoly policy which the developing countries will apply, based on their primary commodities, and the role that OPEC can play in this context.