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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Hotelling’s rule

But conditions require the optimal extraction path to fulfill the following relation Gaitan et al. Assuming that the extraction is carried out with constant unit costs. 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.

He began by recognizing the inadequacy of the standard economic analysis in the industry in which production was bound to decline Bradley However, if we gradually resolve these restrictions, we can get interesting conclusions that have important meaning for mineral industry. Ludwig von Mises Institute, pp. Exhausstible 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 ezhaustible value of the resource capital over the extraction period.

Pierce and Turner, Otto et al. If this condition holds, then it is indifferent for exhaustibl 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.

School of Business and department of Economics. The lower the transport costs, the more likely are the returns to scale. 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 As such, the price of the natural resource should increase with time, provided that the marginal costs are resoruces constant Chakravorty et al.

Gray inconsidering the case of a single mine owner. The exhausible finds that while the Hotelling theory had ecknomics 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.


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. Perhaps, to explain the real-world phenomena, it would be helpful to relax these assumptions.

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Analysis of Harold Hotelling’s Theory – The WritePass Journal : The WritePass Journal

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. Assuming that private and social discount rates are the same and that there are no externalities Gaitan et al. This would not only decrease the transport costs, but will also increase efficiency in the supply chain and logistics. Therefore a competitive mining firm will rise its production until its marginal production cost and the opportunity cost reaches the market price: The objective is to maximize the marginal net revenue of extraction of the non-renewable resource.

That is, they all treat natural resources as provided freely by nature. Resourcces this respect, to reduce on the marginal cost of extraction, it would require that an industry be located close to the extraction point.

Therefore a competitive mining firm will rise its production until its marginal production cost and the opportunity cost reaches the market price:. The concept of resource rent also includes biological and other renewable resources.

Another error that Hotelling made was linking his highly conditional analysis to the real world Braddley Whilst Hotelling was quick to recognize market failure, he failed to account for what is rexources known as government failure Braddley 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 Representation of the Hotelling rent user cost and the Ricardian rent.

Then the optimal path of extraction of the natural resource would be found by the following equation. 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 resourcrs Braddley 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.


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 Views Read Edit View history. This concept was the result of analysis of non-renewable resource management by Harold Hotellingpublished in the Journal of Political Economy in 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 Since this theory is valid only under several restricting conditions, which are not realistic in the real world, the validity of his finding were debated several times, especially in the s.

It has formed the conceptual and theoretical framework used by economists to model the supply and the prices of nonrenewable resources. His theory is fundamental in two aspects: 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. From Wikipedia, the free encyclopedia. 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:.

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.

Economists have long been concerned with the extraction of natural resources. The firm, extracting mine G at the marginal production cost, will be competitive only, if the market price covers its production costs and exhaustibls opportunity cost see figure 1.

Retrieved from ” https: The efficient use of scarce natural resources, both renewable and non-renewable sources, has long been a concern of natural resource economics Shogren If each portions of the product has the same price, then the price equals the marginal cost of the product. The opportunity cost or rather the shadow price at time t, Yt, is in the present case constant. The lifetime measures of most resources can thus be assumed to remain constant over time.

This page was last edited on 12 Octoberat Resource-based economic growth, past and present.