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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Therefore during the evaluation of the currently extracted resource, that value should also be considered that would have been reached if the resource would be extracted in the future. Not to be confused with Hotelling’s law. According to the hotelling theory, the most profitable extraction is one in which the price of the resource, determined by the marginal net revenue from sale of the resource, increases at the rate of interest.

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.

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 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.

The Hotelling rule presumes the validity of the following conditions for the examined period: 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.

Oil, hotellingg, and government: A feature shared by all these economists is their treatment of natural resources as a free factor of production. 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 exhzustible present.

In other words, the resource rent is the resource royalty or resource’s net price price received from selling the resource minus costs. Hotelling rent, scarcity rent, user cost, royalty.

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EconPapers: The Economics of Exhaustible Resources

Moreover, the assumption of an increase in scarcity of non renewable resources is highly debatable. Autobahn or Cul de Sac? In eexhaustible similar vein, Ricardo explored on the significance of land quality on economic rent. And given that in a market economy, then it can be seen that equation iv reflects the Hotelling rule that the marginal price of the natural resource increases with increase in the rate of discount.

The Economics of Exhaustible Resources

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. 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 Another error that Hotelling made was linking his highly conditional analysis to the real world Braddley Error, group does not exist!

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 Ludwig von Mises Institute, pp.

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.

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. Also, economic indicators do not provide evidence of an increase in scarcity of these resources Krautkraemer As such, the price of the natural resource should increase with time, provided that the marginal costs are kept constant Chakravorty et al. The lifetime econommics of most resources can thus be assumed to remain constant over time.

The selfish exploitation of natural resources at a rapid rate gave rise to the conservation movement Rothband In this case costs are zero. Including student tips and advice.

InHarold Hotellingan American economist has published an article with title “The economics of exhaustible resources”, which findings serve as a exhaustigle theory for economics of non-renewable resources. 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.

Logistics thus has an important role to play in determining the optimal extraction solution. School of Business and department of Economics.

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Hotelling’s rule – Wikipedia

Hotelling’s article pointed out that economic behaviour lf mining firms differs from behaviour of other industrial sectors. Only an omniscient planner would know the specifics of demand, supply, price, cost, interest rates, and entreprenurial alertness needed to arrive at an optimal extraction solution Braddley Theorists such as Hotelling and Gray particularly pointed out to the additional intertemporal cost of extracting natural resources Shogren In this respect, to reduce on the marginal cost of extraction, it would require that an industry be located close to the extraction point.

Retrieved hogelling ” https: The concept of resource rent also includes biological and other renewable resources. Then the optimal path of extraction of the natural resource would be hoteelling by the following equation. Gray inconsidering the case of a single mine owner. The increase of nominal price of the resource by the Hotelling rule takes place until the exhaustion of the resource. The firm should reach a price for the product that the cost of the last unit of the product will be recovered.

By using this site, you agree to the Terms of Use and Privacy Policy. If each portions of the product has the same price, then the price equals the marginal cost of the product. 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. But when there is a fall below the ppm level, the prices are bound to rise again Chakravorty et al. Therefore a competitive mining firm will rise its production until its marginal production cost and the opportunity cost reaches the market price: This future value, which is lost due to extracting the resource today is called as the opportunity cost.

The user cost has at least two important properties. The paper presents a model of the Hotelling rule and examines its applicability to real life phenomena. This has been argued to mitigate the scarcity effect Krautkraemer The resource rent therefore equals the shadow value of the natural resource or natural capital.

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