Best Answer
A backstop or choke price is a concept used in the management of non-renewable resources, particularly in the context of commodities such as petroleum or natural gas. It refers to a predetermined price level at which the resource becomes economically viable to extract or produce.
In the absence of substitutes for a non-renewable resource, a backstop price becomes crucial for sustainable resource management. This is because non-renewable resources are finite and their extraction and consumption can have detrimental effects on the environment and society.
Having a backstop price ensures that resource extraction or production continues only when it becomes economically viable. This helps prevent overexploitation or premature depletion of the resource. Without a backstop price, there is a risk of extracting the resource at uneconomical levels, leading to increased costs, inefficiency, and potential resource depletion.
Furthermore, the absence of substitutes increases the importance of a backstop price as it acts as a market signal for the scarcity and value of the resource. It incentivizes conservation efforts and encourages the development of alternative technologies or fuels, which can reduce dependence on the non-renewable resource.
On the other hand, if there are substitutes available for the non-renewable resource, the role of a backstop price may be less significant. Substitutes can lessen the demand for the resource, reducing the urgency to establish a backstop price. However, even in the presence of substitutes, a backstop price can still be important for ensuring the economic viability and sustainability of resource extraction.
In conclusion, a backstop or choke price is crucial when managing non-renewable resources, particularly in the absence of substitutes. It helps prevent overexploitation, depletion, and inefficient extraction practices. Additionally, the backstop price acts as a market signal for resource scarcity, encouraging conservation efforts and the development of alternative technologies.
