Question

The profile of efficient allocation depends on the resource itself. It is known that if the resource can be extracted at a constant marginal cost, the efficient quantity of the depletable resource extracted declines over time. a. What happens if no substitute is available? b. Would this still be the case if a renewable substitute is found?

Short answer

Answer: (a) When no substitute is available for the depletable resource, the efficient quantity of resource extraction declines over time due to rising prices and increasing scarcity. (b) When a renewable substitute is found, the efficient allocation of the depletable resource may change and might no longer result in a constant declining extraction rate, as the demand for the depletable resource will likely decline and shift towards the renewable substitute.

Step-by-step solution

Understanding efficient allocation of depletable resources

When a resource is depletable, it means that once it is depleted, it cannot be replenished. To allocate such resources efficiently, the extraction rate should take into account the scarcity of the resource, the marginal cost of extracting it, and the demand for the resource. The efficient allocation may change over time due to changing demand and scarcity of the resource.

Depletable resource without a substitute

In the absence of any substitute for the depletable resource, the demand for the resource will generally be high. As the resource is depleting, its scarcity will increase and thus, its price will tend to rise over time. With constant marginal extraction costs, it becomes more valuable to conserve the resource for future use given the increasingly higher returns from extracting it later. Therefore, the efficient allocation of a depletable resource, in this case, would result in the declining quantity of resource extraction over time.

Depletable resource with a renewable substitute

If a renewable substitute for the depletable resource is found, the demand for the depletable resource will likely decrease due to the availability of an alternative option. This, in turn, could lead to a lower rate of increase in the depletable resource's price over time. The availability of a renewable substitute may also affect the efficient allocation pattern of the depletable resource. As a society becomes more reliant on the renewable substitute, the need to extract the depletable resource at a constant declining rate might no longer be optimal. It could result in maintaining or even increasing the quantity of the depletable resource extracted over time depending on how it compares to the renewable substitute in terms of market demand, cost, and environmental sustainability. In conclusion: a. When no substitute is available for the depletable resource, the efficient quantity of the resource extracted declines over time due to rising prices and increasing scarcity. b. When a renewable substitute is found for the depletable resource, the efficient allocation may change and might no longer result in a constant declining extraction rate, as the demand for the depletable resource will likely decline and shift towards the renewable substitute.

Key concepts

Resource Scarcity and Demand

Resource scarcity is a fundamental problem in economics, referring to the limited availability of a resource relative to the desires or needs of people. The standard demand-supply model in economics tells us that as a resource becomes scarcer, its price tends to rise, assuming the demand remains stable or increases. This incentivizes producers to either find ways to more efficiently use the resource or to search for substitutes.

When we consider a depletable resource, one that cannot be replenished or regenerated, scarcity takes on an even more crucial role. The demand for such resources, such as fossil fuels, often remains robust due to a lack of immediate and viable alternatives. However, as the exercise demonstrates, the scarcity of a depletable resource, when paired with constant marginal costs of extraction, typically leads to a strategy of conservation: extracting less of the resource over time to ensure future availability and to benefit from potentially higher future prices.

Marginal Cost of Extraction

Understanding marginal cost is essential when discussing depletable resources. The marginal cost of extraction refers to the cost of extracting an additional unit of a resource. This concept is pivotal for determining how much of a resource to extract at any given time. A constant marginal cost indicates that the expense of extracting each additional unit is the same, regardless of how much has already been extracted.

However, in the real world, the marginal cost of extraction often increases as a resource becomes more scarce due to the fact that the easiest and cheapest to access materials are usually extracted first. The rising marginal costs can act as a deterrent to consumption and an encouragement to conserve. When applying this concept to efficient allocation, it would mean that as marginal costs rise, the incentive to conserve the resource for future use intensifies, especially when no substitute is present, as highlighted in the exercise steps.

Renewable Substitutes for Depletable Resources

The discovery or development of renewable substitutes for depletable resources can dramatically change their demand and efficient allocation patterns. A renewable substitute, such as solar energy as an alternative to coal, can provide a sustainable option that may either supplement or completely replace the depletable resource. This shift can alleviate some of the scarcity pressures.

Such substitutes often have a more stable or declining cost curve over time due to technological progress and economies of scale. As people and industries adapt, the demand for the depletable resource may decrease, leading to a potentially less aggressive conservation strategy as described in the exercise scenario. This transition to renewables not only ensures a steadier supply but also aligns with environmental goals, ultimately redefining the dynamics of resource allocation and use.