As with any good economic model/principle, let's start with a few assumptions to a) motivate the problem, b) set the stage, and c) simplify the explanation to cut off the fat and get to the meat.
- Suppose a private owner owns the complete stock of a natural resource.
- The complete stock of the resource is fully known and there is no more.
- Once some of the stock is withdrawn, the resource withdrawn is used completely with no waste and nothing left over for reuse.
- The stock can never regenerate itself.
- The cost of withdrawing a unit of the resource is always the same (to make things really simple, we will assume the cost of extraction is $0).
- There are no alternatives to the resource.
For those who like to picture what these assumptions mean, think of yourself as being the sole owner of a giant bowl of all of the existing M&M's in the world (and the recipe for M&M's and all other candy has been lost so no more M&M's or other candy exist or will ever be made)*.
Given the 6 assumptions, how would you manage your stock of M&M's? And what affect would that have on the price of M&M's. Read on...