Template-Type: ReDIF-Paper 1.0
Author-Name: David Comerford
Author-Name-First: David
Author-Name-Last: Comerford
Author-Email: david.comerford@strath.ac.uk
Author-Workplace-Name: Department of Economics, University of Strathclyde
Title: The interaction of scale economies and  energy quality
Abstract: Ubiquitous in the natural resources literature is that resource scarcity is associated with
high resource prices that incentivise the exploitation of marginal resources and the usage of
alternatives. In this paper, this incentive is higher profitability in the extractive sector, rather
than simply a higher price for its output. Since energy is an essential input to the economy,
its supply affects the marginal products of other factors, and in general equilibrium its supply
affects the costs that the extractive industry faces. Energy sector profitability is therefore
ambiguously affected by the quality of available energy resources. There are conditions related
to the returns to scale in the economy which can cause lower energy sector profitability with
lower energy quality. This means that marginal resources may be abandoned as high quality
resources are lost. An economy which exhibits constant, or weakly increasing, returns to scale
can operate at any level of energy quality, since profitability rises with falling energy quality
and we observe results consistent with the usual Hotellings Rule. However an economy which
exhibits strongly increasing returns to scale cannot operate with only low quality energy
resources and profitability may fall with falling energy quality. It is therefore possible that an
energy quality shock disincentivises, rather than incentivises, the use of marginal resources
and alternatives. Ultimately, a strongly increasing returns to scale economy may have no
steady state equilibrium under a decentralised market allocation, despite such an allocation
being technologically feasible.

Length:  pages
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File-URL: https://www.strath.ac.uk/media/1newwebsite/departmentsubject/economics/research/researchdiscussionpapers/22-09_The_interaction_of_scale_economies_and_energy_quality.pdf
File-Format: Application/pdf
Number: 22 9
Classification-JEL: Q30, Q43.
Keywords: Non-Renewable Resources, Energy, General Equilibrium, Returns to Scale.
Handle: RePEc:str:wpaper:22 9