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The Hotelling's Rule Revisited in a Dynamic General Equilibrium Model

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  • Beatriz Gaitan
  • Richard S.J. Tal
  • I. Hakan Yetkiner

Abstract

The validity of the Hotelling’s rule, the fundamental theorem of nonrenewable resource economics, is limited by its partial equilibrium nature. One symptom of this limitation may be the disagreement between the empirical evidence, showing stable or declining resource prices, and the rule, predicting exponentially increasing prices. In this paper, we study the optimal depletion of a nonrenewable resource in a dynamic general equilibrium framework. We show that in, the long run, the price of a nonrenewable (i) is constant when the nonrenewable is essential in production, and (ii) it increases only if the rate of return of capital is larger than the capital depreciation rate and if the non-renewable is an inessential input in production. We believe that our model offers a theoretical explanation to non-growing nonrenewable prices and hence at least partially solves the paradox between the Hotelling’s rule and the empirical regularities. We also show that two factors play a crucial role in determining the long run behavior of non-renewable prices, namely the elasticity of substitution between input factors, and the long run behavior of the real interest rate. Another major achievement of this study is the full analytical solution of the model under a Cobb-Douglas technology.

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File URL: http://www.degit.ifw-kiel.de/papers/degit_09/C009_033.pdf
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Bibliographic Info

Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c009_033.

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Length: 29 pages
Date of creation: Jun 2004
Date of revision:
Handle: RePEc:deg:conpap:c009_033

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Keywords: Nonrenewable resources; One-sector growth model; Hotelling’s Rule; Sustainability;

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References

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  1. Smith, Vernon L, 1971. "Economics of Production from Natural Resources: Reply," American Economic Review, American Economic Association, vol. 61(3), pages 488-91, June.
  2. Weinstein, Milton C & Zeckhauser, Richard J, 1975. "The Optimal Consumption of Depletable Natural Resources," The Quarterly Journal of Economics, MIT Press, vol. 89(3), pages 371-92, August.
  3. Peterson, Frederick M & Fisher, Anthony C, 1977. "The Exploitation of Extractive Resources: A Survey," Economic Journal, Royal Economic Society, vol. 87(348), pages 681-721, December.
  4. Stiglitz, Joseph E, 1976. "Monopoly and the Rate of Extraction of Exhaustible Resources," American Economic Review, American Economic Association, vol. 66(4), pages 655-61, September.
  5. R. M. Solow, 1973. "Intergenerational Equity and Exhaustable Resources," Working papers 103, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Richard L. Gordon, 1967. "A Reinterpretation of the Pure Theory of Exhaustion," Journal of Political Economy, University of Chicago Press, vol. 75, pages 274.
  7. Sweeney, James L, 1977. "Economics of Depletable Resources: Market Forces and Intertemporal Bias," Review of Economic Studies, Wiley Blackwell, vol. 44(1), pages 125-41, February.
  8. Jeffrey A. Krautkraemer, 1998. "Nonrenewable Resource Scarcity," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 2065-2107, December.
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Cited by:
  1. Katrin Rehdanz & David Maddison, 2009. "The amenity value of climate to households in Germany," Oxford Economic Papers, Oxford University Press, vol. 61(1), pages 150-167, January.
  2. Ý. Hakan Yetkiner, 2007. "Does Price of an Essential Non-Renewable Resource Necessarily Grow?," Papers of the Annual IUE-SUNY Cortland Conference in Economics, in: Proceedings of the Conference on Globalization and Its Discontents, pages 131-147 Izmir University of Economics.
  3. Pushpam Kumar & Uwe A. Schneider, 2008. "Greenhouse gas emission mitigation through agriculture," Working Papers FNU-155, Research unit Sustainability and Global Change, Hamburg University, revised Feb 2008.
  4. Katrin Rehdanz & Richard S.J. Tol & Patrick Wetzel, 2005. "Ocean Carbon Sinks And International Climate Policy," Working Papers FNU-60, Research unit Sustainability and Global Change, Hamburg University, revised Feb 2005.
  5. Richard S.J. Tol, 2006. "Integrated Assessment Modelling," Working Papers FNU-102, Research unit Sustainability and Global Change, Hamburg University, revised May 2006.
  6. Jacqueline M. Hamilton, 2005. "Coastal landscape and the hedonic price of accommodation," Working Papers FNU-91, Research unit Sustainability and Global Change, Hamburg University, revised Sep 2005.
  7. Tol, Richard S.J., 2007. "Europe's long-term climate target: A critical evaluation," Energy Policy, Elsevier, vol. 35(1), pages 424-432, January.

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