Nonrenewable resources
Slides [link]Required Reading
- KO chapter 6
- Watch this short video on the Ogallala Aquifer.
- Recommended: Look at the graphics in this NYT article on groundwater depletion in the US.
Response questions
- What is the Hotelling Rule, in your own words?
Key Points
- Exhaustible resources are rarely exhausted.
- But fact that they are not replaceable imposes an intertemporal externality. Using a resource today reduces the stock available for future generations.
- Efficient resource extraction maximizes the present value of net benefits.
- The true marginal cost of extraction is the opportunity cost of the resource. This includes the marginal extraction cost and the scarcity rent (marginal user cost).
- The Hotelling Rule describes a rule for extracting resource optimally. In the simplest case, it states that the scarcity rent should rise at the discount rate across two periods.
- If property rights are well defined, and the market is competitive, a private resource owner will extract resources at the dynamically efficient rate. Understand when the market extraction path will and won't be optimal.