IDEAS home Printed from https://ideas.repec.org/a/kap/enreec/v18y2001i1p129-148.html
   My bibliography  Save this article

Capacity Choice and the Theory of the Mine

Author

Listed:
  • Robert Cairns

    ()

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

Suggested Citation

  • Robert Cairns, 2001. "Capacity Choice and the Theory of the Mine," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 18(1), pages 129-148, January.
  • Handle: RePEc:kap:enreec:v:18:y:2001:i:1:p:129-148
    DOI: 10.1023/A:1011114400536
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1023/A:1011114400536
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Ciarns, Robert D & Lasserre, Pierre, 1986. " Sectoral Supply of Minerals of Varying Quality," Scandinavian Journal of Economics, Wiley Blackwell, vol. 88(4), pages 605-626.
    2. 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.
    3. 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.
    4. Pierre Lasserre, 1985. "Capacity Choice by Mines," Canadian Journal of Economics, Canadian Economics Association, vol. 18(4), pages 831-842, November.
    5. Davis, Graham A. & Moore, David J., 1998. "Valuing mineral reserves when capacity constrains production," Economics Letters, Elsevier, vol. 60(1), pages 121-125, July.
    6. 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.
    7. Lewis Cecil Gray, 1914. "Rent under the Assumption of Exhaustibility," The Quarterly Journal of Economics, Oxford University Press, vol. 28(3), pages 466-489.
    8. 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.
    9. Lasserre, P., 1982. "Exhaustible-Resource Extraction with Capital," Cahiers de recherche 8208, Universite de Montreal, Departement de sciences economiques.
    10. 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.
    11. 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.
    12. Hartwick, John M. & Kemp, Murray C. & Van Long, Ngo, 1986. "Set-up costs and theory of exhaustible resources," Journal of Environmental Economics and Management, Elsevier, vol. 13(3), pages 212-224, September.
    13. 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 349-356, May.
    14. Farrow, Scott, 1985. "Testing the Efficiency of Extraction from a Stock Resource," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 452-487, June.
    15. 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.
    16. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. Cairns, Robert D. & Calfucura, Enrique, 2012. "OPEC: Market failure or power failure?," Energy Policy, Elsevier, vol. 50(C), pages 570-580.
    3. Cairns, Robert D. & Shinkuma, Takayoshi, 2003. "The choice of the cutoff grade in mining," Resources Policy, Elsevier, vol. 29(3-4), pages 75-81.
    4. Okullo, Samuel J. & Reynès, Frédéric & Hofkes, Marjan W., 2015. "Modeling peak oil and the geological constraints on oil production," Resource and Energy Economics, Elsevier, vol. 40(C), pages 36-56.
    5. Frank Pothen, 2012. "A Partial Equilibrium Model of Metals with an Application for Rare Earth Elements," EcoMod2012 4411, EcoMod.
    6. 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.

    More about this item

    Keywords

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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:enreec:v:18:y:2001:i:1:p:129-148. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: http://www.springer.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.