May 27, 2010
Although much has been written about the implications of monopoly power for the rate of extraction of natural resources, the specific case in which the resource can be sold in two markets with different elasticities of demand has escaped notice. We find that a monopolist facing two markets with differing iso-elastic demand schedules extracts more rapidly than the social planner, whether or not arbitrage prevents price discrimination between markets. This analysis is relevant in the case of many resources — such as natural gas used for power generation and household heating, or petroleum used for making plastics and as fuel.
