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 has shown that since the quantity of the resource is limited exhaustiblewe should consider that the resource extracted and consumed today will be not available for future generations.
The Economic Journalvol. His theory is fundamental in two aspects: 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.
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 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.
He ezhaustible by recognizing the inadequacy of the standard economic analysis in the industry in which production was bound to decline Bradley Error, group does not exist! Ludwig von Mises Institute, pp. The theory thus proposed the time track of natural thf extraction that most increases the value of the resource reserve.
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.
Autobahn or Cul de Sac? Perhaps, to explain the real-world phenomena, it would be helpful to resourcea these assumptions. However, the Hotelling theory, though elegant, seem somewhat misplaced.
EconPapers: The Economics of Exhaustible Resources
Assuming that the extraction is carried out with constant unit costs. More so, it has contributed to the conservationist movement. 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.
A feature shared by all these economists is their treatment of natural resources as a free factor of production. The increase of nominal price of the resource by the Hotelling rule takes place until the exhaustion of the resource. The user cost has at least two important properties. Hotellihg such as Hotelling and Gray particularly pointed out to the additional intertemporal cost of extracting natural resources Shogren Including student tips and advice. 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.
He also argues that such wasteful forms of exploitation would have been regulated in the interest of the general public Braddley From Wikipedia, the free encyclopedia. If resources are considered to be scarce, then there is a higher likelihood of its real price rising Braddley The Hotelling rent and the Hotelling rule 1. The lifetime measures exhauztible most resources can thus be assumed to remain constant over time.
In Summary, the Hotelling theory has contributed to the economics of nonrenewable resources.
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Hotelling rent, scarcity rent, user cost, royalty. Due to this variety of terms, several times it was misinterpreted. 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: 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.
The concept of resource rent also includes biological and other renewable resources.
Analysis of Harold Hotelling’s Theory – The WritePass Journal : The WritePass Journal
Oil, gas, and government: Hotelling’s article pointed out that economic behaviour of mining firms differs from behaviour of other industrial sectors. These assumptions seem not applicable to the real world. The opportunity cost or rather the shadow price at time t, Yt, is in the present case constant.
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 exhaustiblee technology is still not available. Journal of Political Economy 39 2— 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 Therefore a competitive mining firm will rise its production until its marginal production cost and the opportunity cost reaches the market price: