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Natural Resource Extraction in a Federation

Author

Listed:
  • Robin Boadway

    (Queen's University, ON, Canada)

  • Motohiro Sato

    (Hitotsubashi University, Japan)

  • Jean-François Tremblay

    (University of Ottawa, ON, Canada)

Abstract

We analyze a natural resource extraction problem in a two-region economy with mobile labour. One of the regions produces only manufacturing goods while the other produces agriculture and extracts a nonrenewable natural resource. The manufacturing sector exhibits increasing returns-to-scale if the level of production is sufficiently high. There are multiple equilibrium allocations of labour towards which the economy may converge in the long-run depending on the initial stock of natural resource and the initial distribution of labour. Under decentralized resource management, there is a tendency to over-extract the resource relative to the constrained federal optimum, which tends to enlarge the set of initial conditions under which the economy converges to the low-income equilibrium. The optimal path of extraction from the perspective of the federation satisfies a modified Hotelling’s rule that takes into account the impact of resource extraction on manufacturing production.

Suggested Citation

  • Robin Boadway & Motohiro Sato & Jean-François Tremblay, 2017. "Natural Resource Extraction in a Federation," Working Papers 1714E, University of Ottawa, Department of Economics.
    • Handle: RePEc:ott:wpaper:1714e
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    References listed on IDEAS

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    5. Robin W. Boadway & Frank R. Flatters, 1982. "Efficiency and Equalization Payments in a Federal System of Government: A Synthesis and Extension of Recent Results," Canadian Journal of Economics, Canadian Economics Association, vol. 15(4), pages 613-633, November.
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    More about this item

    Keywords

    Natural resource extraction; decentralization; inter-regional mobility;
    All these keywords.

    JEL classification:

    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)

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