Discussion Paper

Monopoly Extraction of an ExhaustibleResource with Two Markets

Jan 31, 2004 | Carolyn Fischer, Ramanan Laxminarayan


Although much has been written about the implications of monopoly power for the rateof extraction of natural resources, the specific case in which the resource can be sold in twomarkets with different elasticities of demand has escaped notice. We find that a monopolistfacing two markets with differing iso-elastic demand schedules extracts more rapidly than thesocial planner, whether or not arbitrage prevents price discrimination between markets. Thisanalysis is relevant in the case of many resources — such as natural gas used for power generationand household heating, or petroleum used for making plastics and as fuel.