A model of mining and exploring for exhaustible resources

A model of extractive industries is developed, in which firms select the time-paths of exploration and extraction that maximize their present values. Two externalities unique to the exploration process are found to distort industry behavior. Industry behavior is simulated under conditions of competition, monopoly, and central management, and the effects of percentage depletion allowances and changes in the discount rate are observed. Monopolists overconserve the resource and hold excess reserves; competitors who enter mineral lands freely tend to overexplore and overextract; percentage depletion allowances decrease reserves; and higher discount rates reduce extraction in the long run.