Optimal Subsidy for Investment in Extraction Technology in a Small Open Economy with a Non-renewable Natural Resource

Kamil Aliyev ()
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Kamil Aliyev: Graduate School of Economics, Osaka University

No 23-12, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: We develop a small open economy model with non-renewable natural resource, where firms can improve the extraction technology by investment. We analytically derive the equilibrium investment in extraction technology and then derive the equilibrium duration of non-renewable resource extraction. We show that a subsidy for investment in extraction technology promotes the investment and extends the duration. Moreover, we assume that the subsidy is financed by the income tax, and examine the effect of the investment subsidy. As a result, the higher the share of natural resource earnings in total output, the weaker the positive effect of subsidy on the duration is. The optimal subsidy which maximizes the profit from natural resource sales is lower as the ratio of resource sales to non-resource output is higher.

Keywords: non-renewable natural resource; small open economy; optimal subsidy (search for similar items in EconPapers)
JEL-codes: H21 O40 Q32 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2023-12
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