Efficiency-Inducing Taxation for a Monopolistically Supplied Depletable Resource

Abstract

Where there is a fixed stock of a depletable resource, Pareto optimality requires that the difference between price and marginal cost of extraction rise at the interest rate. In competitive equilibrium, this condition is fulfilled. A monopolist, however, supplies the resource in such a way that the difference between marginal revenue and marginal extraction cost rises at the rate of interest. As a result, a monopolist will not in general supply the resource efficiently. Depending on the nature of demand, he may supply either more or less rapidly than is required for Pareto optimality. Here we address the question of how a government might specify in advance a time path of per-unit tax or subsidy rates on quantities supplied so as to induce the monopolist to supply the resource efficiently over time.