Joint production of substitutable, exhaustible resources, or: Is flaring gas rational? (Q1102168)

The paper deals with a nice, though rather academic, application of Pontryagin's maximum principle with respect to the exploitation of an exhaustible resource. A monopolist is considered who possesses two finite resource stocks, say oil and gas. The extraction of x units of oil automatically yields and extraction of \(\theta\) x, \(\theta\) is a positive constant, units of gas. The monopolist can choose the extraction rate x and, in addition, whether he wants to sell or to flare the gas. He wants to do this in such a way as to maximize the (discounted) profits. The final time of the process is determined by the optimal date of depletion of the oil (and therefore also the gas). The author considers two cases: i) the products are perfect substitutes of each other and the market price or oil (and/or gas) is a decreasing function of the total amount of oil and gas available; ii) the products of gas and oil are imperfect substitutes and the market prices of oil and gas are different. Depending on the particularities of the problem, it is best in both cases for the monopolist to first flare all the gas and near the end of the process to sell all the gas. For the second case of imperfect substitutes, there is an intermediate time interval during which part of the gas is flared (singular control). The derivation of the optimal decisions by means of the maximum principle is given rather consicely in the appendix.