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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Whilst Hotelling was quick to recognize market failure, he failed to account for what is currently known as government failure Braddley Autobahn or Cul de Sac?

Including student tips and advice. If this condition holds, then it is indifferent for the owner of the resource that it will be extracted now and sold at price P 0or will be extracted at any time in the future and sold at price P t. This theory has formed the basis of the conservationist movement and has been influential to the point that prohibitions against oil and mineral mining and deforestation in certain government lands have been justified on this ground Hotelling In Summary, the Hotelling theory has contributed to the economics of nonrenewable resources.

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.

As a result, his seminal analysis was originally rejected for this reason. According to Hotelling, the opportunity cost is the discounted present value exhsustible the future profit which will be lost due to extracting the resource in the present. First, the user cost is the net present value of the future profit for the mine producing at the marginal production cost, which will be lost if it will extract an addition unit of mineral instead of leaving it in the ground.

Similarly, Jevons raised concern about the consequences of coal depletion on population growth Shogren Resource-based economic growth, past and present. Pierce and Turner, Otto et al.


The Hotelling rent and the Hotelling rule

In other words, the resource rent is the resource royalty or resource’s net price price received from selling the resource minus costs. These assumptions seem not applicable to the real world. What are the advantages and disadvantages of the doctrine? In the optimal case, the demand for the resource will cease due to its high exhausttible when the substitution backstop technology becomes economic and can replace the original resource.

Then the optimal path of extraction of the natural resource would be found by the following equation. In an efficient exploitation of a non-renewable and non-augmentable resource, the percentage change in net-price per unit of time should equal the discount rate in order to maximise the present value of the resource capital over the extraction period.

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EconPapers: The Economics of Exhaustible Resources

In this case costs are zero. But at the time, his analysis was way ahead of time as mathematics had not yet been incorporated into economics. The opportunity cost has different names: If you enjoyed this article, subscribe to receive more just like it. The firm, rfsources 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.

Hotelling’s rule

The paper finds that while the Hotelling theory had contributed to the economics of nonrenewable resources and the rise of the conservationism movement, the assumptions laid out by the theory are not applicable to the real world.

Ludwig von Mises Institute, pp. In conclusion, the paper suggests the need to relax the assumptions in order to explain the real-world phenomena. Egalitarianism as a revolt against nature and other essays, Auburn, AL: The user cost has at least two important properties. Hotelling then asserted that if the total resource base and capital investments were fixed and efficient extraction methods used, then the marginal net revenue of extraction of non-renewable resource would rise at the rate of interest over time Hotelling The lifetime measures of most resources can thus be assumed to remain constant over time.

He began by recognizing the inadequacy of the standard economic analysis in the industry in which production was bound to decline Bradley Theorists such as Hotelling and Gray particularly pointed out to the additional intertemporal cost of extracting natural resources Shogren Therefore a competitive mining firm will rise its production until its marginal production cost and the opportunity cost reaches the market price: Subscribe If you enjoyed this article, subscribe to receive more just like it.


The increase of nominal price of the resource by the Hotelling rule takes place until the exhaustion of the resource. Perhaps, to explain the real-world phenomena, it would be helpful to relax these assumptions. This would not only decrease the transport costs, but will also increase efficiency in the supply chain and logistics. More so, it has contributed to the conservationist movement. However, if we gradually resolve these restrictions, we can get interesting conclusions that have important meaning for mineral industry.

But towards the beginning of the 21st century, a shift in mindset occurred as economists began treating natural resources as something more distinct than just a free factor of production Shogren InHotelling used differential calculus to derive the optimal extraction of a fixed resource over time Bradley The model points out to a rise in trajectory of net prices of non-renewable resources along with the rate of interest yet there is a lack of empirical evidence to back this pricing behaviour.

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. Hotelling rent, scarcity rent, user cost, royalty. As can be seen with the long history of petroleum regulation in the US, government intervention has generally been lacking in information and has been highly problematic in practice Adelman The lower the transport costs, the more likely are the returns hotellingg scale.

This page was last edited on 12 Octoberat Representation of the Hotelling rent user cost and the Ricardian rent. The paper presents a model of the Hotelling rule and examines its applicability to real life phenomena.