Monday, October 22, 2007

Bubbles in Prices of Exhaustible Resources

In Econ211 Environmental Economics we will soon be covering the Hotelling (1931) Rule.

This paper takes it on to look at bubble equilibria. With many non-renewable resource prices at record highs this is a timely paper.


Bubbles in Prices of Exhaustible Resources

New York University - Department of Economics; National Bureau of Economic Research (NBER) August 2007

NBER Working Paper No. W13320

Aside from the equilibrium that Hotelling (1931) displayed, his model of non-renewable resources also contains a continuum of bubble equilibria. In all the equilibria the price of the resource rises at the rate of interest. In a bubble equilibrium, however, the consumption of the resource peters out, and a positive fraction of the original stock continues to trade forever. And that may well be happening in the market for high-end Bordeaux wines.

JEL Classifications: E44, G12

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