The Hotelling's Rule Revisited in a Dynamic General Equilibrium Model
AbstractThe validity of the Hotelling?s rule, the fundamental theorem of nonrenewable resource eco- nomics, 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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Bibliographic InfoPaper provided by Research unit Sustainability and Global Change, Hamburg University in its series Working Papers with number FNU-44.
Length: 24 pages
Date of creation: Jun 2004
Date of revision: Jun 2004
Nonrenewable resources; One-sector growth model; Hotelling?s Rule; Sustainability;
Other versions of this item:
- Beatriz Gaitan S. & Richard S.J. Tol & I. Hakan Yetkiner, 2006. "The Hotelling’s Rule Revisited in a Dynamic General Equilibrium Model," Papers of the Annual IUE-SUNY Cortland Conference in Economics, in: Proceedings of the Conference on Human and Economic Resources, pages 213-238 Izmir University of Economics.
- Beatriz Gaitan & Richard S.J. Tal & I. Hakan Yetkiner, 2004. "The Hotelling's Rule Revisited in a Dynamic General Equilibrium Model," DEGIT Conference Papers c009_033, DEGIT, Dynamics, Economic Growth, and International Trade.
- O4 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
- Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation
- Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
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