Question

Q2) The profile of efficient allocation depends on the resource itself. It is known that if the resource can be extracted at a constant marginal cost, the efficient quantity of the depletable resource extracted declines over time.

a) What happens if no substitute is available?

b) Would this still be the case if a renewable substitute is found?

Answer 1

1. Efficient Allocation :- An efficient allocation of resources appears when we produce the goods and services that people value most extremely. Resources are issued efficiently when it is not possible to produce more of a good or service without giving up some other good or service that is evaluated more highly.

It is well known that if the resource can be draw out at a constant marginal cost, the effective quantity of the exhaustible resource extracted decrease over time.

2. Depletable Resource:- A Depletable resource is not naturally refill or is consumed at such a low rate that it can be refilled. Examples:- Oil, Natural Gas, Coal etc.

a) If there is no substitute available for depletable resource then it will be consumed faster. There will be shortage of resources, in future time people will not be able to use resources.

b) If there is a renewable substitute found for depletable resource of the marginal cost of this substitute will increase.