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The Pricing of Durable Exhaustible Resources

Author

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  • David Levhari
  • Robert S. Pindyck

Abstract

Partial or total durability characterizes a large class of exhaustible resources. We show that Hotelling's r-percent rule will apply to a durable resource produced in a competitive market, but will not apply if the resource is produced in a monopolistic market. However, the r-percent rule does not mean that price is steadily rising. We show that in general the competitive market price will fall initially as the stock in circulation increases, and later will rise as the stock decreases and eventually depreciates toward zero after production ceases. Accounting for durability may thus help explain the U-shaped long-term price profiles observed for many resources.

Suggested Citation

  • David Levhari & Robert S. Pindyck, 1981. "The Pricing of Durable Exhaustible Resources," The Quarterly Journal of Economics, Oxford University Press, vol. 96(3), pages 365-377.
  • Handle: RePEc:oup:qjecon:v:96:y:1981:i:3:p:365-377.
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    File URL: http://hdl.handle.net/10.2307/1882678
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    Citations

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    Cited by:

    1. Devarajan, Shantayanan & Fisher, Anthony C, 1981. "Hotelling's "Economics of Exhaustible Resources": Fifty Years Later," Journal of Economic Literature, American Economic Association, vol. 19(1), pages 65-73, March.
    2. Karp, Larry, 1996. "Monopoly Power Can Be Disadvantageous in the Extraction of a Durable Nonrenewable Resource," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 825-849, November.
    3. Cuddington, John T. & Nülle, Grant, 2014. "Variable long-term trends in mineral prices: The ongoing tug-of-war between exploration, depletion, and technological change," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 224-252.
    4. Rosendahl, Knut Einar & Rubiano, Diana Roa, 2018. "How effective is lithium recycling as a remedy for resource scarcity?," Working Paper Series 3-2018, Norwegian University of Life Sciences, School of Economics and Business, revised 16 Apr 2018.
    5. Atewamba, Calvin & Gaudet, Gérard, 2014. "Prices of durable nonrenewable natural resources under stochastic investment opportunities," Resource and Energy Economics, Elsevier, vol. 36(2), pages 528-541.
    6. Ngo Long, 2015. "Dynamic Games Between Firms and Infinitely Lived Consumers: A Review of the Literature," Dynamic Games and Applications, Springer, vol. 5(4), pages 467-492, December.
    7. Gaudet, Gerard & Salant, Stephen W., 2003. "The effects of periodic quotas limiting the stock of imports of durables," Journal of Economic Theory, Elsevier, vol. 109(2), pages 402-419, April.
    8. Friedman, A., 2010. "Water-Saving Technology and Efficient Tariffs," Journal of the New Economic Association, New Economic Association, issue 8, pages 35-53.
    9. Dale W. Henderson & John S. Irons & Stephen W. Salant & Sebastian Thomas, 1997. "Can government gold be put to better use?: Qualitative and quantitative policies," International Finance Discussion Papers 582, Board of Governors of the Federal Reserve System (U.S.).
    10. Davis, Graham A. & Moore, David J., 1998. "Valuing mineral reserves when capacity constrains production," Economics Letters, Elsevier, vol. 60(1), pages 121-125, July.
    11. Barbiroli, Giancarlo & Focacci, Antonio, 1999. "An appropriate mechanism of fuels pricing for sustainable development," Energy Policy, Elsevier, vol. 27(11), pages 625-636, October.
    12. Gérard Gaudet, 2007. "Natural resource economics under the rule of Hotelling," Canadian Journal of Economics, Canadian Economics Association, vol. 40(4), pages 1033-1059, November.
    13. Salant, Stephen W., 2013. "The equilibrium price path of timber in the absence of replanting: does Hotelling rule the forests too?," Resource and Energy Economics, Elsevier, vol. 35(4), pages 572-581.
    14. John Hartwick, 2001. "National Accounting with Natural and Other Types of Capital," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 19(4), pages 329-341, August.
    15. Barsky, Robert B & Summers, Lawrence H, 1988. "Gibson's Paradox and the Gold Standard," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 528-550, June.
    16. Hartwick, John M., 1994. "Calcul de la valeur de différents types d’entreprises extractives," L'Actualité Economique, Société Canadienne de Science Economique, vol. 70(2), pages 191-197, juin.
    17. Salant, Stephen, 2012. "The Equilibrium Price Path of Timber in the Absence of Replanting," Discussion Papers dp-12-38, Resources For the Future.
    18. Margaret E. Slade & Henry Thille, 2009. "Whither Hotelling: Tests of the Theory of Exhaustible Resources," Annual Review of Resource Economics, Annual Reviews, vol. 1(1), pages 239-259, September.

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