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A note on the logical inconsistency of the Hotelling Rule: A Revisit from the System's Analysis Perspective

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  • Nikolay Khabarov
  • Alexey Smirnov
  • Michael Obersteiner

Abstract

The "Hotelling rule" (HR) called to be "the fundamental principle of the economics of exhaustible resources" has a logical deficiency which was never paid a sufficient attention to. This deficiency should be taken into account before attempting to explain discrepancies between the price prediction provided by the HR and historically observed prices. Our analysis is focused on the HR in its original form, we do not touch upon other aspects such as varying extraction costs and other ways of upgrading the original model underlying the Hotelling rule. We conclude that HR can not be derived from the simple models as it was claimed, therefore it should be understood as an assumption on its own, and not as a rule derived from other more basic assumptions.

Suggested Citation

  • Nikolay Khabarov & Alexey Smirnov & Michael Obersteiner, 2023. "A note on the logical inconsistency of the Hotelling Rule: A Revisit from the System's Analysis Perspective," Papers 2310.12807, arXiv.org.
    • Handle: RePEc:arx:papers:2310.12807
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    References listed on IDEAS

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    1. Harold Hotelling, 1931. "The Economics of Exhaustible Resources," Journal of Political Economy, University of Chicago Press, vol. 39(2), pages 137-137.
    2. Partha Dasgupta & Geoffrey Heal, 1974. "The Optimal Depletion of Exhaustible Resources," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(5), pages 3-28.
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