On ad valorem taxation of nonrenewable resource production

Taxing a nonrenewable resource typically shifts production through time, compresses the economically recoverable resource base and shrinks social welfare. But by how much? In this paper a computational model of natural gas use, representing numerous demand and supply features believed important for shaping efficient intertemporal allocations, is utilized to answer this question under different ad valorem royalty taxes on wellhead production. Proportionate social welfare losses from fixed royalties up to 30% are found to be small and the excess burden stands at less than 6.5% for a 30% royalty. This result replicates findings of several earlier studies and points to a general conclusion. (C) 1997 Elsevier Science B.V.