Sheet1 Page 1 Short - run economic rent - is the difference between total revenue and total variable cost Long run economic rent - all costs are variable because the oil company can choose to withdraw from a oil providence or not t o Dangers in taxing away short run rents - it may discourage oil companies because the tax is too high and the rate of return is t o Ads and disads of leaseblock auctions as a method for extracting rents Advantages 1. the government gains income early in the life of the field 2. the company must value the lease block the most, therefore it must be the least cost producer otherwise it wouldn't have bi d 3. there is no other payment to be made, sometimes the distortion of annual payments or royalty payments is not an issue 4. the amt of the bid, in a competitive auction, will approach the value of the discounted rent disadvantages 1. lack of information, bids may be too low 2. oil companies are not well diversified, and therefore the expected discount rate will be high thus bids will be low
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This note was uploaded on 05/06/2008 for the course ECON 233 taught by Professor Hallwood during the Spring '08 term at UConn.