Shantayanan Devarajan, Chalongphob Sussangkarn, Effective Rates of Protection when Domestic and Foreign Goods are Imperfect Substitutes: The Case of Thailand, The Review of Economics and Statistics, Vol. 74, No. 4 (Nov., 1992), pp. 701-711

This paper takes the view that a project is a disturbance to an economy in equilibrium, and examines the shadow prices for project evaluation under alternative assumptions about how equilibrium is restored. When the government reacts by altering its foreign exchange reserves—a nondistortionary adjustment mechanism—the shadow prices coincide with those advocated in the manuals on social cost-benefit analysis. However, if the government adjusts its domestic expenditures or tariff rates, the shadow prices will differ from those of the manuals, except insofar as the relative shadow prices of tradeables remain their relative border prices.

Noting that a suggested measure of natural resource scarcity, resource rent, is unobservable, we show that rent is linked to (observable) marginal exploration cost. A two-period model of extraction and exploration reveals that rent is equal to this cost when discovery is certain. Under risky exploration, cost data can be used to bound rent. The model also indicates how exploration uncertainty affects the competitive firm's extraction and exploration decisions. Finally, the behavior of U.S. oil and gas exploration costs suggests that these costs were rising in the postwar era, which has different implications for scarcity than indicated by other measures of scarcity.