Optimal Research and Extraction Policy Towards a Backstop Technology

The optimal solution represents the welfare-maximizing research and extraction policy. The welfare-maximizing solution provides a useful benchmark against which the degree of subopti- mality of different types of solutions, such as the market solution, or the balanced growth path can be judged. This is important since suboptimal policies may actually be sustainable whereas the optimal solution may not, i.e. the aims of sustainability and welfare-maximization may be conflicting. A comparison of the suboptimal policy with the optimal policy reveals the efficiency loss associated with implementing the former.

The main novel features of the model compared to the existing models in the literature are the reliance of the research sector on the exhaustible resource and uncertain arrival time of an alternative technology that makes the exhaustible resource redundant both for the production of output and for research. The higher the research input, the shorter the expected waiting time to technological transition. The expected arrival time depends on research. 

Last edited: 23 October 2017