Alternative Bidding Systems
On the premise that all federal lands should be leased only by competitive bidding, we consider in this chapter several alternative systems or bases of bidding (for example, bonus bidding or royalty bidding).1 The discussion pertains generally to all mineral fuels. In evaluating these alternative systems, the assumed objective is to maximize the extent to which the government captures the present value of the pure economic rent generated by the lands. This objective is the more likely to be achieved the more competitive the bidding (which, assuming independence of bids increases with number bidding), the lesser the degree of uncertainty or risk borne by the bidders, and the lesser the extent to which the bid variable affects the margin of development and recovery of resources. Operating efficiency and environmental protection, which are not particularly pertinent to the evaluation of bidding systems, will be discussed in chapters 7 and 8. We take as given the manner of taxing income from minerals production and assume that prospective lessees are generally risk-averse.
We shall first consider bonus bidding and, to emphasize its implications, assume that the specified royalty rate is zero or very low.____________________