The Green Paradox as a Supply Phenomenon
The Green Paradox as a Supply Phenomenon
The green paradox arises from the reaction of non-renewable-resource suppliers in anticipation of future price changes. Yet there exists no formal treatment of non-renewable resource supply, systematically deriving quantity as function of price. Assuming a simple two-date setting, this chapter establishes instantaneous restricted (fixed reserves) and unrestricted resource supply functions and studies their basic properties. Supply at one date depends on the price at the other date. The effect of a price change can be decomposed into an intertemporal substitution effect and a stock compensation effect. Unlike the Slutsky decomposition of demand, the substitution effect always dominates so that a price increase at one date causes supply to decrease at the other date. The analysis can be used to explain policy-induced extraction changes like the green paradox by the method of partial equilibrium where supply intersects with demand.
Keywords: Green Paradox, non-renewable resources, supply, price change, decomposition, intertemporal substitution, compensation, stock, reserves
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