In this chapter, we introduce the simple conception of a scarce resource, locally owned and globally traded. It is the classic Quadrant 1 resource, valuable and scarce. Production amounts to making it available for sale into an economic market in which its scarcity affects its price. Accordingly, price is endogenous to the resource system. Production is the same as consumption, which is tantamount to destruction: irreversible conversion to other chemical forms with no recycling. The owner's basic decision is how fast to produce.

That the resource is finite is a first principle. The fact that some portion of the resource is undiscovered at any point in time does not change its finiteness. What does change, over time, is the improving state of knowledge about how much of the resource there is. Decisions about how fast to produce are always reached within an environment of imperfect knowledge and speculation about future discoveries. There is a need to make decisions in this uncertain environment and a need to adjust continually as new information becomes available. Exploration reduces, but does not eliminate, uncertainty.

This case is extreme in its simplicity. It is elaborated below; the example of petroleum is used throughout. Many critical concepts of resource economics are introduced and carried forward into subsequent chapters.

COSTLESS PRODUCTION OF A STERILE RESOURCE

Base Case

This is the simplest case of exhaustion of a finite resource.