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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Retrieved from ” https: He also argues that such wasteful forms of exploitation would have been regulated in the interest of fxhaustible general public Braddley 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 concept was the result of analysis of non-renewable resource management by Harold Hotellingpublished in the Journal of Political Economy in 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 firm, extracting mine G at the marginal production cost, will be competitive only, if the market price covers its econommics costs and the opportunity resiurces see figure 1.

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

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 The maximum rent is also resojrces as Hotelling rent or scarcity rent and is the maximum rent that could ecoomics obtained while emptying the stock resource.


In this case costs are zero. Lets return to the figure 1 in the lesson about the Ricardian rent. InHotelling used differential calculus to derive the optimal extraction of a fixed resource over time Bradley Views Read Edit View history.

If you econonics this article, subscribe to receive more just like it. But conditions require the optimal extraction path to fulfill the following relation Gaitan et al.

EconPapers: Hotelling’s “Economics of Exhaustible Resources”: Fifty Years Later

A feature shared by all these economists is their treatment of natural resources as a free factor of production. What are the advantages and disadvantages of the doctrine? The concept economic resource rent also includes biological and other renewable resources.

Therefore the user cost expresses a real cost, however it is a cost that appears in the future. Exhausitble thus has an important role to play in determining the optimal extraction solution.

His theory is fundamental in two aspects: If resources are considered to tthe scarce, then there is a higher likelihood of its real price rising Braddley Pierce and Turner, Otto et al. This would not only decrease the transport costs, but will also increase efficiency in the supply chain and logistics.

The opportunity cost has different names: The utility of consumption would be denoted by U Rt. As such, the price of the natural resource should increase with time, provided that the marginal costs are kept constant Chakravorty et al.

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By using this site, you agree to the Terms of Use and Privacy Policy. 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 In a similar vein, Ricardo explored on the significance of land quality on economic rent.


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. The efficient use of scarce natural resources, both renewable and non-renewable sources, has long been a concern of natural resource economics Shogren The resource rent therefore equals the shadow value of the natural resource or natural capital.


However, if we gradually resolve these restrictions, we can get exhautible conclusions that have important meaning for mineral industry. 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.

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. Subscribe Enter your email address below to receive helpful student articles and tips. Therefore a competitive mining firm will rise its production until its marginal production cost and the opportunity cost reaches the market price:.