Chapter 8 - RESOURCE DEPLETION AND CAPITAL ACCUMULATION IN A COMPETITIVE ECONOMY

Summary

The Perfect Myopic Foresight Case

(i) Formulation of the problem: The discussion in the previous chapter was designed to explore the consumption possibilities open to a closed economy making use of exhaustible natural resources as inputs in production. It is time that we imposed a specific institutional structure on the economy and analysed its implications. The environment most thoroughly explored is undoubtedly the competitive case. We shall analyse such an economy here.

A difficulty that arises in tracking down the implications of a competitive private ownership economy is the ambiguity in its definition when time is introduced explicitly into the construct and the horizon is assumed to be infinite. We noted an important feature of this in Chapter 6 section 3. There we found that it was possible to have a sequence (in our continuous time example, a continuum) of momentary equilibria along which price expectations are fulfilled at each instant despite an absence of a complete set of forward markets. Further modifications suggest themselves. For example, an absence of forward markets may result in price expectations not being realized. The story is difficult to unravel even when it is assumed that all individuals at a given date are identical and have the same ‘point expectations’—viz. that expectations about future prices are held with certainty. This is so since there are various accounts that one can offer about how expectations are formed.