Courses Previously Offered > ECN 431 Public Economics

Email Questions and Answers

Here are some of the questions I've received by email, along with the answers I sent. The questions are grouped by topic and the topics are listed in roughly chronological order. Both the questions and the answers have been edited to remove personal information.

Exhaustible Resources

Q1 OK, when there are no price ceilings/outside factors impacting the free market, then we should set the MSS (MBi-MECi) equal to the present value of future MSSs and when there are price ceilings or some other factor (like artificial energy sources) then we should focus on getting PV Royalty (P-MEC) = to PV of royalty amounts in future periods?

You're on the right track but I'd put it a little differently:

  1. When you're trying to find the EFFICIENT allocation, set the present values of MSSs (MB-MEC) equal;
  2. When you're trying to find the MARKET equilibrium (that is, what actually happens as opposed to what we might want for efficiency), sellers will shift their supply until the PV of royalties (P-MEC) are equal.

When there are no price ceilings or outside factors interfering with the market, P will equal MB. That means that (1) and (2) will be identical and the market equilibrium will be efficient.

A price ceiling leads to inefficiency because it causes P to differ from MB. When that happens, the market equilibrium will still be determined from (2) but it will no longer be identical to the allocation from (1).

A backstop (such as synthetic fuels) changes the use of an exhaustible resource but doesn't make it inefficient. Once people have adjusted to the existence of the backstop, P will equal MB in each period and the new equilibrium will be efficient.  

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Peter J Wilcoxen, The Maxwell School, Syracuse University
 Revised 04/28/2004