Economics has traditionally concerned itself with 'the best use of scarce means for given ends' (Robbins 1932). Typically, the 'ends' are considered to be achieved when consumers realize maximum possible satisfaction - 'maximum utility' - from the consumption of goods and services. The economy helps realize maximum utility in a three-step procedure. First, resources are extracted and transformed into goods and services. Second, producers supply goods and services to consumers for final use. Finally, wastes from production and consumption are recycled in, or removed from, the economic system.
Typically, market mechanisms are assumed to reconcile the independent decisions of producers and consumers, and to result in a final coherent state of balance between demand for goods and services and supply. This state of balance for an economy is known as a general economic equilibrium (Walras 1954 , 1969). Given the knowledge about consumers' preferences, resource endowments, technologies and market forms, economists can compute the prices and quantities of goods and services that are consistent with economic equilibrium. The equilibrium state can then be used as a reference against which to compare the impacts of alternative actions, such as government interventions in markets, on prices and quantities of goods and services, and the subsequent welfare effects for the economy (Arrow and Hahn 1971).
Instead of dealing with the simultaneous choice of all producers and consumers in an economy, this chapter concentrates on economic models dealing with the optimal extraction of natural resources. The models are, therefore, by their nature partial equilibrium models - all economic conditions outside the resource-extracting sector are assumed to be given, and within that context an equilibrium for extracting firms is identified. The next section addresses basic concepts in economics that are used to model and inform decision making, such as the optimal extraction of resources. The subsequent section then presents a basic theoretical framework that is common to most economic models of resource extraction. That section is followed by a discussion of challenges to the theory and application of optimal resource extraction models. The chapter closes with a review of topics of current research in the economics of resource extraction.
Was this article helpful?