Consider a lobby group of exhaustible-resource suppliers, which bargains with the government over the extraction of an exhaustible resource and over contribution payments. We characterize the equilibrium extraction path and the development of contribution payments in time. The latter relates to the development of the conflict of interest between profit-maximization and welfare-maximization. Resource extraction preferred by the resource owners and by the government both converge to zero in the long run because accumulated extraction increases marginal extraction costs. Due to stock-pollution damages, however, the government would not accept as much total extraction. Accordingly, from some moment on firms pay to be allowed to extract at all, and their payments decline because increasing extraction costs reduce their profits. By contrast, when accumulated extraction is not yet as large, other effects may interfere. The monopolistic distortion implies that the profit-maximizing resource extraction may be too slow to maximize welfare, while flow-pollution damages imply that it may be too fast. Thus, the influence of the lobby group may work in either way, depending on the economy’s characteristics. If the monopolistic distortion is strong enough, contribution payments may develop non-monotonically. As a technical contribution, we demonstrate the influence of a non-negativity constraint on a choice variable in a dynamic bargaining setting.
Joint work with Mark Schopf (University of Paderborn)

Keywords: Environmental Policy; Exhaustible Resources; Political Economy; Lobbying; Nash Bargaining; Dynamic Programming

JEL Codes: D72; Q31; Q38; Q58