Thursday, March 17, 2011

Krugman on Hotelling and the 40% rule

Paul Krugman has a neat piece in the NY times reminiscing about his time as a research assistant for Nordhaus when the latter formualated the hotelling rule of non-renewable resource extraction.

Having seen Marty Weitzman recently present at the World Congress last year I can perfectly imagine how he came up with his 40% rule.

What is the 40% rule you ask?

What was wrong with those circulars? They were much too optimistic about the costs of alternative energy sources, especially alternatives to oil. Basically, the engineers were understating the difficulties involved. Later Marty Weitzman would formulate a law on this: the cost of alternatives to crude oil is 40% above the current price — whatever the current price is.

This is the sort of rule I like. Simple but also entirely doom-laden.

It is almost poetic. My guess is that our increased knowledge and technical expertise will have reduced the 40% rule to somewhere around 20-30%. Can I make a claim to have invented the "approximately 25% rule"?

The links in the Krugman article are worth following. Here is a taster.

The Answer, My Friend [NY Times]

And shining in the sun, too — or so say two papers cited by Brad Plumer, arguing that we can have a fully renewable-based, nuclear-free economy by 2050. And I’m sure that’s right — but I’m a bit skeptical about the cost estimates, for reasons having to do with personal career history.

The story: I effectively began my career as a professional economist way back in the summer of 1973, working as a research assistant for Bill Nordhaus. Nordhaus was in the early stages of a long and highly successful run of research into resource economics, and was trying to come up with a way to estimate “appropriate” energy prices. And he had come up with a wonderfully elegant approach, building off the classic Hotelling model of exhaustible resource pricing.


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