Should We Worry About The Failure Of The Hotelling Rule?

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Should We Worry About The Failure Of The Hotelling Rule?

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Tobias Kronenberg

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Tobias Heinrich Kronenberg

Abstract

The continuing dependence of the global economy on fossil fuels is worrying because it imposes limits on growth due to the non-renewable nature of these resources and also contributes to global climate change. Resource optimists believe that this is no reason to worry, because the economy will always find a way to overcome these constraints. Their arguments, however, require that resource prices reflect the scarcity of non-renewable resources, which implies that they must obey the Hotelling rule. Empirical analyses, however, show that the Hotelling rule does not hold in reality, which raises the question: does the failure of the Hotelling rule imply that social optimality is not achieved? This paper argues that the answer depends on the reason for the failure. If extraction and exploration costs, or technological progress in these activities, are the reasons for the failure, a market failure is not implied, and optimality may still be achieved. But if the Hotelling rule fails due to uncertain property rights or strategic interaction, the market will surely fail to provide an optimal solution. A market failure is likely to speed up resource consumption compared to the social optimum. Copyright © 2008 The Author. Journal compilation © 2008 Blackwell Publishing Ltd.

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Article provided by Blackwell Publishing in its journal Journal of Economic Surveys.

Volume (Year): 22 (2008)
Issue (Month): 4 (09)
Pages: 774-793
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Handle: RePEc:bla:jecsur:v:22:y:2008:i:4:p:774-793

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Cited by:
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Emilie Alberola & Julien Pierre Chevallier, 2007. "European carbon prices and banking restrictions: evidence from phase I (2005-2007)," EconomiX Working Papers 2007-32, University of Paris West - Nanterre la Défense, EconomiX. [Downloadable!]
Other versions:
- Emilie Alberola & Julien Chevallier, 2009. "European Carbon Prices and Banking Restrictions: Evidence from Phase I (2005-2007)," The Energy Journal, International Association for Energy Economics, vol. 30(3), pages 51-80.

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