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Hartwick's rule and maximin paths when the exhaustible resource has an amenity value

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Abstract

This paper studies the maximin paths of the canonical Dasgupta-Heal-Solow model when the stock of natural capital is a direct argument of well-being, besides consumption. Hartwick's rule then appears as an efficient tool to characterize solutions in a variety of settings. We start with the case without technical progress. We obtain an explicit solution of the mmaximin problem in the case where production and utility are Cobb-Douglas. When the utility function is CES with a low elasticity of substitution between consumption and natural capital, we show taht it is optimal to preserve forever a critical level of natural capital, determined endogeneously. We then study how technical progress affects the optimal maximin paths, in the Cobb-Douglas utility case. On the long run path of the economy capital, production and consumption grow at a common constant rate, while the resource stock decreases at a constant rate and is therefore completely depleted in the very long run. A higher amenity value of the resource stock leads to faster economic growth, but to a lower long run rate of depletion. We then develop a complete analysis of the dynamics of the maximin problem when the sole source of well-being is consumption, and provide a numerical resoultion of the model with resource amenity. The economy consumes, produces and invests less in the short run if the resource has an amenity value than if doesn't whereas it is the contrary in the medium and long runs. However, and without surprise, the resource stock remains for ever higher with resource amenity than without.

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File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2008/V08031.pdf
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Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number v08031.

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Length: 35 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:mse:cesdoc:v08031

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Keywords: Exhaustible resources; sustainability; Hartwick's rule.;

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