MONOPOLY PRODUCTION OF DURABLE EXHAUSTIBLE RESOURCES

We examine monopoly production of a durable exhaustible resource. We consider the case in which the monopolist lacks the ability to make binding commitments about future decisions, and must choose from dynamically consistent plans. Two models are considered: a discrete-time model, in which there is a strictly finite initial stock of the resource, and a continuous-time model, in which costs are an increasing function of cumulative production. We find that, in general, monopoly leads to overconservation. The monopolist who cannot precommit produces the efficient quantity ultimately, but does so too slowly. By contrast, the monopolist who can precommit produces less than the efficient stock even in the limit. -from Authors