Nonrenewable Resources with Switching Costs

This paper considers a firmʹs decision to commence or to suspend extraction of a nonrenewable resource when there are start-up or shut-down costs. For a given level of reserves, the critical price that would cause an inactive mine to be opened exceeds the price that would induce an active mine to be closed. As one would expect, greater switching costs cause firms to be less inclined to change status; this impact can be substantial even for modest switching costs. Possible implications of switching costs are considered, including the potential for firms to abandon mines with economically valuable remaining reserves.