AN OPTIMAL CONTROL APPROACH TO THE TAXATION OF EXHAUSTIBLE RESOURCES
YUCEL, MINE KUBAN
Doctor of Philosophy
The effects of taxes on the behavior of a profit maximizing firm which explores and produces an exhaustible resource, are analyzed in an optimal control framework. Specifically, a severance tax, a royalty, a profit tax and various partial expensing provisions are considered for competitive and monopolistic market structures. The producer's response to these taxes is studied and the dead-weight losses from the taxes are calculated. The case of extraction from a fixed reserve base and a variable reserve base are taken separately but the study concentrates on the simultaneous nature of the extraction and exploration decisions. Time paths of exploratory effort, extraction and prices are computed. Two formulations are developed. The first is based on a model of Pindyck. The second formulation assumes a Cobb-Douglas production function for exploration and the current extraction decisions. It is shown that, in this dynamic partial equilibrium process, severance taxes and royalties induce the producer to reduce production and exploration and cause a shift in the time path for prices, similar to the static results. This shift in price, quantity and exploration paths is more pronounced in the competitive case. The profit tax, with complete expensing of costs, is neutral. The deadweight losses associated with the taxes under consideration are very low, especially for low tax rates, in competitive market structures. Higher deadweight losses for monopoly are shown to result from sharper reductions in producer profits rather than higher consumer losses.