Price Uncertainty and the Exhaustive Firm

In an earlier edition of this journal, the risk-neutral exhaustive firm's reactions to various tax-subsidy schemes were explored. Sandmo analyzed the output effects of uncertainty on risk-averse competitive firms and derived comparative statics results dependent on attitudes towards risk, In this paper, we examine the risk-averse exhaustive firm and find: (1) some results are independent of risk aversion assumptions; (2) comparative statics results differ from the no resource constraint case; and (3) results depend on the relative magnitude of the discount rate and fixed costs. It is assumed that capital markets are imperfect, or, alternatively, that if perfect capital markets exist, firms do not have access to them; otherwise risk-aversion would not be operative relative to production decisions as firms would simply extract the resource so as to maximize the discounted present value of profits and then go to the capital market to obtain their desired income stream. This assumption seems to closely approximate real world situations for some resource industries; in particular the coal industry is characterized by a predominance of equity funding, particularly for smaller firms, indicating inaccessibility to capital markets. We find here that even in a simple model, lack of access to perfect capital markets leads to ambiguities and qualitative differences vis-a-vis the risk-neutral firn

Water Law, Water Transfers, and Economic Efficiency: The Colorado River

[No abstract

Democratic Exploitation of a Non-Replenishable Resource

In a recent article, Neher (1976) suggests an interesting democratic process for allocating a scarce, renewable natural resource among different generations. The procedure is characterized by a) continuous voting, b) one person--one vote, c) unsophisticated voting, and d) simple majority rule, and determines the length of the optimal exploitation plan in a society of overlapping generations. Allocations resulting from this plan are revealed to be unjust in the "Rawlsian" sense as the selfishness of living voters is reflected in current decisions. We adopt the same procedure to determine the allocation of a nonrenewable resource under democratic exploitation. With continuous democratic voting, plans are continuously revised and resources are forever being consumed at a rate which is a constant proportion of the total resource available. As before, democratic exploitation of the resource is unjust in the Rawlsian sense: succeeding generations are given smaller allocations of the resource

Capital Gains and the Economic Theory of Corporate Finance

The dependence of one agent’s actions upon those of another constitutes a fundamental departure point for much of received economic theory. Apart from a deterministic setting, the presence of uncertainty implies a dependence on the probable actions of other agents; that is, the ultimate behavior of an individual is to a certain extent a consequence of his beliefs concerning the behavior of other agents. While the difficulty associated with formulating even crude conjectures of this nature is overwhelming, actual informational demands are even greater as from the dependence of agent A’s actions on his beliefs concerning agent B’s actions, it follows directly that agent B’s actions are dependent on his beliefs concerning agent A’s beliefs relative to his (agent B’s) action as well, as infinitum

Price Uncertainty and the Exhaustive Firm

In an earlier edition of this journal, the risk-neutral exhaustive firm's reactions to various tax-subsidy schemes were explored. Sandmo analyzed the output effects of uncertainty on risk-averse competitive firms and derived comparative statics results dependent on attitudes towards risk, In this paper, we examine the risk-averse exhaustive firm and find: (1) some results are independent of risk aversion assumptions; (2) comparative statics results differ from the no resource constraint case; and (3) results depend on the relative magnitude of the discount rate and fixed costs. It is assumed that capital markets are imperfect, or, alternatively, that if perfect capital markets exist, firms do not have access to them; otherwise risk-aversion would not be operative relative to production decisions as firms would simply extract the resource so as to maximize the discounted present value of profits and then go to the capital market to obtain their desired income stream. This assumption seems to closely approximate real world situations for some resource industries; in particular the coal industry is characterized by a predominance of equity funding, particularly for smaller firms, indicating inaccessibility to capital markets. We find here that even in a simple model, lack of access to perfect capital markets leads to ambiguities and qualitative differences vis-a-vis the risk-neutral firn

Monopoly and the rate of extraction of exhaustible resources: Note

[No abstract