Sufficient Conditions for Extracting Least Cost Resource First

Abstract

Kemp and Long demonstrated that it may be preferable to exploit high and low cost resource deposits simultaneously and not in sequence as is typically assumed in the resources literature. They show that it is desirable to delay extraction from low cost pools in order to smooth consumption over time, if the resource in the ground is society's only store of wealth. This paper considers a model in which extracted resources can be converted into capital which may either be consumed or stored to provide for consumption later on. We find that a sufficient condition for the strict sequencing of extraction to be optimal is that stored capital be productive so that it can be used to produce additional capital.