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The Hotelling's Rule Revisited in a Dynamic General Equilibrium Model

  • Beatriz Gaitan de Soto
  • Richard S.J. Tol


    (Economic and Social Research Institute, Dublin)

  • I. Hakan Yetkiner

The validity of the Hotelling?s rule, the fundamental theorem of nonrenewable resource eco- nomics, 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) it increases only if the rate of return of capital is larger than the capital depreciation rate and if 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 regularities. We also show that two factors play a crucial role in determining the long run behavior of non-renewable 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.

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Paper provided by Research unit Sustainability and Global Change, Hamburg University in its series Working Papers with number FNU-44.

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Length: 24 pages
Date of creation: Jun 2004
Date of revision: Jun 2004
Handle: RePEc:sgc:wpaper:44
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  1. Richard L. Gordon, 1967. "A Reinterpretation of the Pure Theory of Exhaustion," Journal of Political Economy, University of Chicago Press, vol. 75, pages 274.
  2. Sweeney, James L, 1977. "Economics of Depletable Resources: Market Forces and Intertemporal Bias," Review of Economic Studies, Wiley Blackwell, vol. 44(1), pages 125-41, February.
  3. Stiglitz, Joseph E, 1976. "Monopoly and the Rate of Extraction of Exhaustible Resources," American Economic Review, American Economic Association, vol. 66(4), pages 655-61, September.
  4. Heal, G., 1990. "The Optimal Use Of Exhaustible Resources," Papers fb-_90-10, Columbia - Graduate School of Business.
  5. Smith, Vernon L, 1971. "Economics of Production from Natural Resources: Reply," American Economic Review, American Economic Association, vol. 61(3), pages 488-91, June.
  6. R. M. Solow, 1973. "Intergenerational Equity and Exhaustable Resources," Working papers 103, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Jeffrey A. Krautkraemer, 1998. "Nonrenewable Resource Scarcity," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 2065-2107, December.
  8. 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.
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