When the government allows private firms to extract minerals offshore or on public lands, two common

When the government allows private firms to extract minerals
offshore or on public lands, two common means of sharing in the profits are
bonus bidding and production royalties. The former awards the right to extract
to the highest bidder, while the second charges a per-ton royalty on each ton
extracted. Bonus bids involve a single, up-front payment, while royalties are
paid as long as minerals are being extracted.

a. If the two approaches are designed to yield the same
amount of revenue, will they have the same effect on the allocation of the mine
over time?

Why or why not?

b. Would
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When the government allows private firms to extract minerals
offshore or on public lands, two common means of sharing in the profits are
bonus bidding and production royalties. The former awards the right to extract
to the highest bidder, while the second charges a per-ton royalty on each ton
extracted. Bonus bids involve a single, up-front payment, while royalties are
paid as long as minerals are being extracted.

a. If the two approaches are designed to yield the same
amount of revenue, will they have the same effect on the allocation of the mine
over time?

Why or why not?

b. Would either or both be consistent with an efficient
allocation? Why or why not?

c. Suppose the size of the mineral deposit and the future
path of prices are unknown. How do these two approaches allocate the risk
between the mining company and the government?

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