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This paper looks into various models that address strategic behavior in the supply of gas by the Mexican monopoly Pemex. The paper has three very strong technical results. First, the netback pricing rule for the price of domestic natural gas (based on a Houston benchmark price) leads to discontinuities in Pemex's revenue function. Second, having Pemex pay for the gas it uses and the gas it flares increases the value of the Lagrange multiplier associated with the gas processing constraint. Third, if the gas processing constraint is binding, having Pemex pay for the gas it uses and flares does not change the short run optimal solution for the optimization problem, so it will have no impact on short-run behavior. These results imply three clear policy recommendations. The first is that the arbitrage point be fixed by the amount of gas Pemex has the potential to supply in the absence of processing and gathering constraints. The second is that Pemex be charged for the gas it uses in production and the gas it flares. The third is that investment in gas processing and pipeline should be in a separate account from other Pemex investment.

In 1997, the Comisión Reguladora de Energía of Mexico implemented a netback rule for linking the Mexican natural gas price to the Texas price. At the time, the Texas price reflected a reasonably competitive market. Since that time, there have been dramatic increases in the demand for natural gas and there are various bottlenecks in the supply of natural gas. As a result, the price of natural gas in Texas now reflects the quasi-rents created by these bottlenecks. We address the optimality of the netback rule when the price of gas at the Texas market reflects the quasi-rents created by bottlenecks in the supply of natural gas to the United States pipeline system. In this paper, it is shown that it is optimal for the Mexican government to use the netback rule based on the Texas price of gas to set the price of natural gas in Mexico even though the Texas market cannot be considered a competitive market, and the Texas price for natural gas reflects quasi-rents created by various bottlenecks.

In the wake of the dissolution of the Soviet Union and the end of the Cold War, the problem of nuclear proliferation has become one of the primary issues of strategic concern The proliferation problem is an old one, but the problem today is very different from that of even a few years ago. calling for new approaches. By considering demand and supply factors, the old approaches that rely on limits on the technology or supply appear inadequate in the current situation Rather, the best approaches today are those that influence demand, making it less attractive for nations to develop nuclear weapons. The constraints on the United States that inhibit it from using its nuclear weapons to threaten new nuclear states make both nuclear deterrence and guarantees to countries not acquiring such weapons ineffectual in preventing further proliferation. The use of conventional forces to prevent proliferation or to protect threatened nations may also be politically difficult unless there are clear national interests at stake.A possible way out of this dilemma is to develop a system of conventional deterrence using precision guided munitions and other recent technological developments that have increased the accuracy of weapons delivery systems. Such a system of conventional deterrence could play an important role in making nuclear weapons of less perceived value to potentially proliferating nations and in protecting regions that these nations threaten.

To determine formally the effects of nuclear proliferation on the probability of a deliberate nuclear war requires more than just qualitative assertions about the change in the probability that an individual nation will initiate a deliberate nuclear war as the number of nuclear powers increases. For a model to predict that an increase in the number of nuclear powers will increase or decrease the probability of a deliberate nuclear war, it is necessary that it be able to predict the cardinality of the change in the probability that any one nation will initiate a nuclear war. Inasmuch as this is beyond the capability of most models in economics and political science, the formal debate on this issue should be viewed with caution. It is likely that the dominant factor when considering the effect of proliferation on the probability of a nuclear war is that it will occur as a result of an accident or other inadvertent behavior.