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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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.
However, the Hotelling theory, though elegant, seem somewhat misplaced. His theory is fundamental in two aspects: Hotelling’s article pointed out that economic behaviour of mining firms differs from behaviour of other industrial sectors. 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.
For example, if the Kyoto Treaty was to impose a target of PPM of carbon, energy prices would be expected to rise but fall soon after the constraint becomes binding Chakravorty et al. Whilst the transport costs are account for a small percentage of the total costs, the optimal extraction solution must also take into account the total logistics costs.
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. Whilst Hotelling was quick to recognize market failure, he failed to account for what is currently known as government failure Braddley If each portions of the product has the same price, then the price equals the marginal cost of the product.
The Hotelling rent and the Hotelling rule
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. Another error that Hotelling made was linking his highly conditional analysis to the real world Braddley The opportunity exhaaustible has different names: This page was last edited on 12 Octoberat 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.
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 Such a cyclical behaviour in the prices of non-renewable resources is not covered under the Hotelling model.
And given that in a market economy, resohrces 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. But conditions require the optimal extraction path to fulfill the following relation Gaitan et al. The increase of nominal price of the resource by the Hotelling rule takes place until the exhaustion of the resource.
In the optimal case, the demand for the resource will cease due to its high price when the substitution backstop technology becomes economic and can replace the original resource. However, if we gradually resolve these restrictions, we can get interesting conclusions that have important meaning for mineral industry.
Perhaps, to explain the real-world phenomena, it would be helpful to relax these assumptions.
The objective is to maximize the marginal net revenue of extraction of the non-renewable resource. Hotelling rent, scarcity rent, user cost, exhaustibls. In this case costs are zero. Subscribe Enter your email address below to receive helpful student articles and tips. 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
InHotelling used differential calculus to derive the optimal extraction of a fixed resource over time Bradley This would not only decrease the transport costs, but will also increase efficiency in the supply chain and logistics. School of Business and econonics of Economics.
The firm should reach a price for the exhausitble that the cost of the last unit of the product will be recovered. Views Read Edit View history. 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 Nonetheless, the popular view that the world is likely run out of natural resources in the near future may not necessarily be true.
Hotelling’s rule – Wikipedia
Autobahn or Cul de Sac? 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 basic theory for economics of non-renewable resources.
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:.
In conclusion, the paper suggests the need to relax the assumptions in order to explain the real-world phenomena. The opportunity cost or rather the shadow price at time t, Yt, is in the present case constant. The concept of resource rent also includes biological and other renewable resources. Resouces assumptions seem not applicable to the real world.