In this paper, we review this “Hotelling puzzle” and suggest modifications to current theory that The prices of exhaustible resources—oil, natural gas, copper, coal, etc. . Review of Economics and Statistics 92 (2), Oil is an exhaustible resource. The economics of exhaustible resources is expressed through Hotelling’s rule. Hotelling’s rule states that the. Hotelling’s rule defines the net price path as a function of time while maximizing economic rent in the time of fully extracting a non-renewable natural resource. ” Hotelling’s ‘Economics of Exhaustible Resources’: Fifty Years Later”. Journal of.

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This is derived form the fact that the resource is non-renewable. According to Hotelling, the opportunity cost is the discounted present value of the future profit which will be lost due to extracting the resource in the present.

Rev Austrian Econ Due to this variety of hotwlling, several times it was misinterpreted. However, in reality such an increase in the price of non-renewable sources may not persist as many short-run factors such as regulation and speculation in commodity markets may come into play resulting in alternative phases of upward and downward price movements Chakravorty et al.

Hotelling’s rule defines the net price path as a function of time while maximizing economic rent in the time of fully extracting a non-renewable natural resource. Such a cyclical behaviour in the prices of non-renewable resources is not covered under the Hotelling model.

If there is still unsatisfied demand for the resource in the time of its exhaustion, it means that the price was not optimal, it could not fulfil the function to regulate the behaviour of consumers, or the backstop technology is still not available.

Egalitarianism as a revolt against nature and other essays, Auburn, AL: Hotelling’s article pointed out that economic behaviour of mining firms differs from behaviour of other industrial sectors.

The Economics of Exhaustible Resources

Not to be confused with Hotelling’s law. But towards the beginning of the 21st century, a shift in mindset occurred as economists began treating natural resources as something more distinct than just a free factor of production Shogren Subscribe If you enjoyed this article, subscribe to exhaustile more just like it.


The paper presents a model of the Hotelling rule and examines its applicability to real life phenomena. For example, if the Kyoto Treaty was to impose a target of PPM of carbon, energy prices would be expected to rise but fall soon after the constraint becomes binding Chakravorty et al.

The Economic Journalvol.

This would not only decrease the transport costs, but will also increase efficiency in the supply chain and logistics. The firm should reach a hhe for the product that the cost of the last unit of the product will be recovered. What are the advantages and disadvantages of the doctrine?

In Summary, the Hotelling theory has contributed to the economics of nonrenewable fconomics. The lower the transport costs, the more likely are the returns to scale. A feature shared by all these economists is their treatment of natural resources as a free factor of production. InHarold Hotellingan American economist has published an article with title “The economics exhaustivle exhaustible resources”, which findings serve as a basic theory for economics of non-renewable resources. Therefore a competitive mining firm will rise its production until its marginal production cost and the opportunity cost reaches the market price:.

This has been argued to mitigate the scarcity effect Krautkraemer He also argues that such wasteful forms of exploitation would have been regulated in the interest of the general public Braddley The efficient use of scarce natural resources, both renewable and non-renewable sources, has long been a concern of natural resource economics Shogren Ludwig von Mises Institute, pp.

This theory has formed the basis of the conservationist movement and has been influential to the point that prohibitions against oil and mineral mining and deforestation in certain government lands have been justified on this ground Hotelling Although the popuplar view among the general public is that exhaustion of non-renewable resources is progressing at a faster rate, this view is highly debatable.

Hotelling then asserted that if the total resource base and capital investments were fixed and efficient extraction methods used, then the marginal net revenue of extraction of non-renewable resource would rise at the rate of interest over time Hotelling Representation of the Hotelling rent user cost and the Ricardian rent.


The Hotelling rent and the Hotelling rule

Therefore a competitive mining firm will rise its production until its marginal production cost and the opportunity cost reaches the market price: The maximum rent is also known as Hotelling rent or scarcity rent and is the maximum rent that could be obtained while emptying the stock resource.

However, if we gradually resolve these restrictions, we can get interesting conclusions that have important meaning for mineral industry. In conclusion, the paper suggests the need to relax the assumptions in order to explain the real-world phenomena.

The selfish exploitation of natural resources at a rapid rate gave rise to the conservation movement Rothband Autobahn or Cul de Sac? But when there is a fall below the ppm level, the prices are bound to rise again Chakravorty et al.

Hotelling’s rule

In the optimal case, the demand for the resource will cease due to its high price when the substitution backstop technology becomes economic and can replace the original resource.

The objective is to maximize the marginal net revenue of extraction of the non-renewable resource. Subscribe Enter your email address below to receive helpful student articles and tips. The theory thus proposed the time track of natural resource extraction that most increases the value of the resource reserve.

The model points out to a rise in trajectory of net prices of non-renewable resources along with the rate of interest yet there is a lack of empirical evidence to back this pricing behaviour. He began by recognizing the inadequacy of the standard economic analysis in the industry in which production was bound to decline Bradley Other important meaning of the user cost is that it expresses the in situ value of the resource, the value of the resource before the extraction for the mine producing at the marginal production cost.

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