Question

Label the following as true, false, or uncertain and explain your choice. (Uncertain means that it can be either true or false depending upon the circumstances.)

(a) All members of a resource cartel share a common objective, namely increase prices as much and as soon as possible.

(b) By holding prices lower than they would otherwise be, placing a price control on a depletable resource increases both the speed with which the resource is extracted over time and the cumulative amount ultimately extracted.

(c) A price control actually has no influence on the extraction path of a depletable resource until such time as the market price actually reaches the level of the price control.

(d) Forcing companies that drill offshore for oil to compensate victims of any oil spill from one of its facilities would be an efficient requirement.

Answer 1

a). iIt iis ia ifalse istatement, ibecause iof ithe icircumstances ithat icartel imembers iwho ihave ismalll istocks iof ithe idepletable iresources i(i.e., ia iresource ithe istock iof iwhich idecreases iwhenever iit iis ibeing iused iand idoes inot iincrease iover ithe itime i iand iwhich iare irelevant ifor ieconomic idecision-making isuch ias ideposits iof icoal, ioil, ior iminerals) iwill ibe imore isupportive, ibut ithe icartel imembers iwho iare ithe iholder iof ilarge istocks iwill ibe iin ianxiety iof iincreasing iin iearly ihigh iprice ithat ilead ito iearlier iswitch ito irenewables iand idue ito iwhich ithey iwill ibe ileaving iwith istocks iof iunsold iresources. i i

b). iIt iis ia ifalse istatement, ibecause iof ithe icircumstances ithat iby iholding iprices ilower ithan ithey iwould iotherwise ibe, iplacing ia iprice icontrol ion ia idepletable iresource iwould iincrease ithe ispeed iwith iwhich ithe iresource iis iextracted iover itime ibut iit iwould ilower ithe icumulative iamount iultimately iextracted. i

c). iIt iis ia ifalse istatement, iit iis ithat ibecause iby ireducing ithe icost iof imarginal iuser ithen ia iprice icontrol ican iinfluence ithe iextraction ipath iof ia idepletable iresource iwell ibefore ithe itime ithat ithe imarket iprice iactually ireaches ithe ilevel iof ithe iprice icontrol. i

d). iForcing icompanies ithat idrill ioffshore ifor ioil ito icompensate ivictims iof iany ioil ispill ifrom ione iof iits ifacilities iwould ibe ian iefficient irequirement ihence iIt iis ia iuncertain istatement ibecause iwhile iinternalizing ithe iexternality, ias iproposed ihere, iis igenerally ia imove itoward iefficiency, ithe idetails ido imatter. iThe ilevel iof icompensation ican ibe itoo ihigh ior itoo ilow. iFor iefficiency ithe ipayments iof icompensation ishould iequal ito ithe idamages icaused. iExcessive icompensation ican ibe iinefficient iby iraising ithe iexpected icost iof ifuture ioperations imore ithan ithe iefficient ilevels, iit ican iprevent isome iefficient ioil idrilling. iAdditionally, iinadequate icompensation iby iultimately iunderstating ithe ifuture iexpected icost, ican ihelp iin iexcessive ioil idrilling.