Wednesday, October 24, 2007

Natural resource economics under the rule of Hotelling

More on the Hotelling Rule ahead of this years lecture on the subject. As this is a presidential address it is more accessible than most academic papers.


Natural resource economics under the rule of Hotelling

* Gérard Gaudet
Département de sciences économiques and CIREQ, Université de Montréal

Presidential address delivered at the 41st Annual Meeting of the Canadian Economics Association, Halifax, 2 June 2007.


Natural resource stocks held in situ are physical assets. Equilibrium in the assets market requires that their rates of return be such that their owners are just willing to hold on to them rather than invest elsewhere. I discuss a number of factors relating to the evolution of extraction costs, to the durability of the resource, to market structure, and to uncertainty, that are important in correctly characterizing the rate of return on holding exhaustible natural resource stocks. The emphasis is put on how those factors can potentially help bridge the gap between the basic Hotelling's rule of natural resource exploitation and the historical behaviour of the flow price of a number of resources. I also highlight some theoretical and empirical issues that need further attention.

Opening paragraph:

The year 2006 marked the 75th anniversary of the publication in the Journal of Political Economy of Harold Hotelling’s ‘The economics of exhaustible resources’ (Hotelling 1931). The word seminal takes all its sense when we write or speak about this article. Rarely has a single paper had as much influence on the development of a whole field of economic research as this one has had on the economics of exhaustible resources. This anniversary provides a good occasion to look back at how the famous Hotelling’s rule of natural resource exploitation has evolved as a framework for understanding the functioning of natural resource markets and to look forward at some unresolved issues, both theoretical and empirical, that would help reconcile the theory and the facts about resource price behaviour over time.


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