|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:
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.