Discuss the Hotelling’s rule of non-renewable resource.
⇒The Hotelling’s rule (1931) states that most socially economically profitable extraction path of a non-renewable resource is along which the price of the resource, determined by the marginal net revenue from the role of the resource increase at the rate of interest. It describes the time path of natural resource extraction which maximizes the value of the resource stock.
A numerical example may help thus suppose the interest rate is 10% and the net price (P-MC) i.e. user cost per unit of the resource is rupees 20. If the net price (user cost) is not expected to grow by 10% to rupees 22 next year, the extractor will extract more of the resource in the current period. This is because if his sale the resource now he will earn 20 rupees and he will invest in interest bearing assets where he will earn interest of 10% on rupees 20.
If the net price is expected to go above rupees 22 i.e. to grow faster than the rate of interest—the producer will have no incentive at all to extract in the current period. Thus is because any unit exhausted today will be worked less in a year than a unit extracted and sold a year from now.
If the net price is expected to go above rupees 22 i.e. to grow faster than the rate of interest—the producer will have no incentive at all to extract in the current period. Thus is because any unit exhausted today will be worked less in a year than a unit extracted and sold a year from now.
P0=mc+P1-mc/1+r
Or P0=c+P1-c/1+r [Where mc=c]
P0 is the present price of a unit of resource.
P1 is the future price of a unit of resource.
Now, if we consider that the marginal cost of C of extraction is small relative to price of the resource than we can rewrite the equation in the following manner.
P0=P1/1+r
=>P1=P0(1+r)
P0 is the present price of a unit of resource.
P1 is the future price of a unit of resource.
Now, if we consider that the marginal cost C of extraction is small relative to price of the resource than we can rewrite the equation in the following manner.
P0=P1/1+r
=>P1=P0(1+r)
Thus along the optimum path resource prices grow at the discount rate or rate of interest. The higher discount rate the faster will the price of resource rise along the optimum path. A higher discount rate reduces the user cost of the resource and causes mine owners to deplete their resource at a faster rate.
Thus along the optimum extraction path (the resource owner is indifference regarding extracting or living the resource in ground) the price of the resource which is P1 in our above example has to rise at a rate equal to the discount rate or rate of it interest.
| Article and Schedule Quiz | Start Test! |
