The length of optimal extraction programs when depletion affects extraction costs (Q800215)

The authors consider a resource extraction problem in an industry where the unit extraction cost increases discontinuously and the demand for the resource drops to zero at a finite choke price P(0) (i.e., doesn't require an infinite price to be choked off). Under some regularity conditions (absence of fixed costs is one) on the revenue R(q) and cost C(q,S) functions (q \(= rate\) of extraction, S \(= stock\) of resource still remaining), the authors argue that optimal extraction takes place in finite time if the value of the unit cost function (lim C(q,S)/q as \(q\to 0)\) jumps discontinuously up to or above the choke price P(0) as reserves fall; otherwise, i.e., if the unit cost function increases continuously to P(0) as reserves fall, optimal extraction must take an infinite time, theoretically at least. One implication of these results, according to the authors, is that when the cost function is approximated by a step function for computational purposes, no matter how fine the approximation is, optimal extraction will terminate in finite time, even though the original problem takes an infinite time. The problem is analyzed separately in discrete and continuous formulations.