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Capacity Choice and the Theory of the Mine

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  • Robert Cairns

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Abstract

When extraction from mineral deposits is constrained byfixed capacity, an r-per-cent rule holds. This deposit-specific rule,however, is ``more partial'' than Hotelling's rule in that it is followed byprice takers and does not require price to adjust to produce equilibrium. Toobtain the resource rent to which the rule applies, the shadow value ofcapacity must be subtracted from the usual net price, i.e., price lessshort-run marginal cost. But the shadow value of capacity cannot becalculated from common depreciation formulas; an alternative method ofcalculating the shadow values is derived. The shadow value of reserves maybe increasing in the level of initial reserves. If there are increasingreturns to installing capacity, the value of the resource is not equal tothe discounted resource rent. Copyright Kluwer Academic Publishers 2001

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File URL: http://hdl.handle.net/10.1023/A:1011114400536
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Bibliographic Info

Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

Volume (Year): 18 (2001)
Issue (Month): 1 (January)
Pages: 129-148

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Handle: RePEc:kap:enreec:v:18:y:2001:i:1:p:129-148

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Web page: http://www.springerlink.com/link.asp?id=100263

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Keywords: capacity; constrained output; r-per-cent rule;

References

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  1. Denise Young, 1992. "Cost Specification and Firm Behaviour in a Hotelling Model of Resource Extraction," Canadian Journal of Economics, Canadian Economics Association, vol. 25(1), pages 41-59, February.
  2. Cairns, Robert D, 2000. "Accounting for Resource Depletion: A Microeconomic Approach," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 46(1), pages 21-31, March.
  3. Farrow, Scott, 1985. "Testing the Efficiency of Extraction from a Stock Resource," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 452-87, June.
  4. Lasserre, P., 1985. "Capacity Choice by Mines," Cahiers de recherche 8501, Universite de Montreal, Departement de sciences economiques.
  5. Lasserre, P., 1982. "Exhaustible-Resource Extraction with Capital," Cahiers de recherche 8208, Universite de Montreal, Departement de sciences economiques.
  6. Davis, Graham A. & Moore, David J., 1998. "Valuing mineral reserves when capacity constrains production," Economics Letters, Elsevier, vol. 60(1), pages 121-125, July.
  7. Graham A. Davis, 1996. "Option Premiums in Mineral Asset Pricing: Are They Important?," Land Economics, University of Wisconsin Press, vol. 72(2), pages 167-186.
  8. Harry F. Campbell, 1980. "The Effect of Capital Intensity on the Optimal Rate of Extraction of a Mineral Deposit," Canadian Journal of Economics, Canadian Economics Association, vol. 13(2), pages 349-56, May.
  9. Robert D. Cairns & Graham A. Davis, 1998. "On Using Current Information To Value Hard-Rock Mineral Properties," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 658-663, November.
  10. Solow, Robert M, 1974. "The Economics of Resources or the Resources of Economics," American Economic Review, American Economic Association, vol. 64(2), pages 1-14, May.
  11. Cairns, Robert D., 1998. "Sufficient conditions for a class of investment problems," Journal of Economic Dynamics and Control, Elsevier, vol. 23(1), pages 55-69, September.
  12. Miller, Merton H & Upton, Charles W, 1985. "A Test of the Hotelling Valuation Principle," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 1-25, February.
  13. Cairns, R. & Lasserre, P., 1985. "Sectoral Supply of Minerals of Varying Quality," Cahiers de recherche 8534, Universite de Montreal, Departement de sciences economiques.
  14. Cairns, Robert D. & Van Quyen, Nguyen, 1998. "Optimal Exploration for and Exploitation of Heterogeneous Mineral Deposits," Journal of Environmental Economics and Management, Elsevier, vol. 35(2), pages 164-189, March.
  15. John Hartwick & Murray Kemp & Ngo van Long, 1980. "Set-up Costs and Theory of Exhaustible Resources," Working Papers 412, Queen's University, Department of Economics.
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Citations

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Cited by:
  1. Cairns, Robert D. & Shinkuma, Takayoshi, 2003. "The choice of the cutoff grade in mining," Resources Policy, Elsevier, vol. 29(3-4), pages 75-81.
  2. Pothen, Frank, 2013. "The metal resources (METRO) model: A dynamic partial equilibrium model for metal markets applied to rare earth elements," ZEW Discussion Papers 13-112, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Pothen, Frank, 2014. "Dynamic market power in an exhaustible resource industry: The case of rare earth elements," ZEW Discussion Papers 14-005, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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