The Hotelling’s Rule Revisited in a Dynamic General Equilibrium Model
In: Proceedings of the Conference on Human and Economic Resources
The validity of the Hotelling’s rule, the fundamental theorem of nonrenewable resource economics, 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) increases only if the rate of return of capital is larger than the capital depreciation rate and 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 regularity. We also show that two factors play a crucial role in determining the long run behavior of nonrenewable 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.
|This chapter was published in: ||This item is provided by Izmir University of Economics in its series Papers of the Annual IUE-SUNY Cortland Conference in Economics with number
200619.||Handle:|| RePEc:izm:prcdng:200619||Contact details of provider:|| Fax: (90) 232 279 2626|
Web page: http://eco.ieu.edu.tr
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Heal, Geoffrey M., 1993.
"The optimal use of exhaustible resources,"
Handbook of Natural Resource and Energy Economics,in: A. V. Kneese† & J. L. Sweeney (ed.), Handbook of Natural Resource and Energy Economics, edition 1, volume 3, chapter 18, pages 855-880
- Heal, G., 1990. "The Optimal Use Of Exhaustible Resources," Papers fb-_90-10, Columbia - Graduate School of Business.
- Stiglitz, Joseph E, 1976. "Monopoly and the Rate of Extraction of Exhaustible Resources," American Economic Review, American Economic Association, vol. 66(4), pages 655-661, September.
- R. M. Solow, 1974. "Intergenerational Equity and Exhaustible Resources," Review of Economic Studies, Oxford University Press, vol. 41(5), pages 29-45.
- R. M. Solow, 1973. "Intergenerational Equity and Exhaustable Resources," Working papers 103, Massachusetts Institute of Technology (MIT), Department of Economics.
- Smith, Vernon L, 1971. "Economics of Production from Natural Resources: Reply," American Economic Review, American Economic Association, vol. 61(3), pages 488-491, June.
- Peterson, Frederick M & Fisher, Anthony C, 1977. "The Exploitation of Extractive Resources: A Survey," Economic Journal, Royal Economic Society, vol. 87(348), pages 681-721, December.
- James L. Sweeney, 1977. "Economics of Depletable Resources: Market Forces and Intertemporal Bias," Review of Economic Studies, Oxford University Press, vol. 44(1), pages 125-141.
- Richard L. Gordon, 1967. "A Reinterpretation of the Pure Theory of Exhaustion," Journal of Political Economy, University of Chicago Press, vol. 75, pages 274-274.
- Jeffrey A. Krautkraemer, 1998. "Nonrenewable Resource Scarcity," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 2065-2107, December. Full references (including those not matched with items on IDEAS)