Capacity Choice and the Theory of the Mine

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