In this paper, we review this “Hotelling puzzle” and suggest modifications to current theory that The prices of exhaustible resources—oil, natural gas, copper, coal, etc. . Review of Economics and Statistics 92 (2), Oil is an exhaustible resource. The economics of exhaustible resources is expressed through Hotelling’s rule. Hotelling’s rule states that the. Hotelling’s rule defines the net price path as a function of time while maximizing economic rent in the time of fully extracting a non-renewable natural resource. ” Hotelling’s ‘Economics of Exhaustible Resources’: Fifty Years Later”. Journal of.
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Nonetheless, the exhaustiblf view that the world is likely run out of natural resources in the near future may not necessarily be true. However, in reality such an increase in the price of non-renewable sources may not persist as many short-run factors such as regulation and speculation in commodity markets may come into play resulting in alternative phases of upward and downward price movements Chakravorty et al.
Assuming that private and social discount rates are the same and that there are no externalities Gaitan et al. In a similar vein, Ricardo explored on the significance of land quality on economic rent.
EconPapers: The Economics of Exhaustible Resources
The Economic Journalvol. Similarly, Jevons raised concern about the consequences of coal depletion on population growth Shogren Subscribe If you enjoyed this article, subscribe to receive more just like it.
Error, group does not exist! Although the popuplar view among the general public is that exhaustion of non-renewable resources is progressing at a faster rate, this view is highly debatable.
Hotelling’s rule – Wikipedia
In this case costs are zero. He began by recognizing the inadequacy of the standard economic analysis in the industry in which production was bound to decline Bradley Autobahn or Cul de Sac? This would not only decrease the transport costs, but will also rwsources efficiency in the supply chain and logistics.
In other words, under a perfectively competitive market, the market price of a non-renewable resource minus the marginal costs must grow in tandem with the interest rate.
The paper presents a model of the Horelling rule and examines its applicability to real life phenomena. The opportunity cost has different names: However, the Hotelling theory, though elegant, seem somewhat misplaced.
The efficient use of scarce natural resources, both renewable and non-renewable sources, has long been a concern of natural resource economics Shogren According to Hotelling, the opportunity cost is the discounted present value of the future profit which will be lost due to extracting the resource in the present. InHotelling used differential calculus to derive the optimal extraction of a fixed resource over time Bradley For example, in order to explain the price of oil, it would be necessary to discard all assumptions of inevitable increase in price and the assumption of a fixed stock.
This has been argued to mitigate the scarcity effect Krautkraemer The economic rent obtained is an abnormal rentoften referred to as resource rentsince it generates from a situation where the resource owner has open access to the resource for free. The resource rent therefore equals the shadow exnaustible of the natural resource or natural capital.
The firm should reach a price for the product that the cost of the ecknomics unit of the product will be recovered.
Gray inconsidering the case of a single mine owner. However, if we gradually resolve these restrictions, we can get interesting conclusions that have important meaning for mineral industry. Other important meaning of the user cost is that it expresses the in situ value of the resource, the value of the resource before the extraction for the mine producing at the marginal production cost.
A feature shared by all these economists is their treatment of natural resources as a free factor of production. The opportunity cost or rather the shadow price at time t, Yt, is in the present case constant. The user cost has at least two important properties.
Hotelling faulted laissez-faire for deviating from his derived optimality in extraction of non-renewable resources, stating that the extractive industries had discrepancies which resulted in wasteful forms of exploitation Braddley The concept of resource rent also includes biological and other renewable resources. The increase of nominal price of the resource by the Hotelling rule takes place until the exhaustion of the resource.
If resources are considered to be scarce, then there is a higher likelihood of its real price rising Braddley This page was last edited on 12 Octoberat Also, economic indicators do not provide evidence of an increase in scarcity of these resources Krautkraemer Hotelling’s rule defines the net price path as a function of time while maximizing economic rent in the time of fully extracting a non-renewable natural resource.
Hotelling’s “Economics of Exhaustible Resources”: Fifty Years Later
An important point to emphasize in the Hotelling model is that the market price of non-renewable resources must increase with time, provided that costs remain time-invariant Chakravorty et al.
Therefore a competitive mining firm will rise its production until its marginal production cost exhaustibe the opportunity cost reaches ths market price:. Hotelling rent, scarcity rent, user cost, royalty. He also argues that such wasteful forms of exploitation would have been regulated in the interest of the general public Braddley Logistics thus has an important role to play in determining the optimal extraction solution.
In the event of an increase in real price, producers are likely to be induced by the high prices to explore for more reserves resulting in an increase in resource stock Braddley If each portions of the product has the same price, then the price equals the marginal cost of the product. Egalitarianism as a revolt against nature and other essays, Auburn, AL: According to the basic theory of micro-economics, a competitive and profit-maximizing firm will rise his output until his marginal cost reaches the market price:.
The firm, extracting mine G at the marginal production cost, will be competitive only, if the market price covers its production costs and the opportunity cost see figure 1. The lifetime measures of most resources can thus be assumed to remain constant over time.
This theory has formed the basis of the conservationist movement and has hotellign influential to the point that prohibitions against oil and mineral mining and deforestation in certain government lands have been justified on this ground Hotelling But at the time, his analysis was way ahead of time as mathematics had not yet been incorporated into economics.
The Economics of Exhaustible Resources
After Otto Other important meaning of the user cost is that it expresses the in situ value of the resource, the value of the resource before the extraction for the mine producing at the marginal production cost. Pierce and Turner, Otto et al. If there is still unsatisfied demand for the resource in the time of its exhaustion, it means that the price was not optimal, it could not fulfil the function to regulate the behaviour of consumers, or the backstop technology is still not available.