ERE6: NonRenewable Resources

1
ERE6 Non-Renewable Resources

• Mineral Reserves
• Social optimum, perfect market monopoly
• Sensitivity
• Royalty and revenue taxes
• Reality

2
Mineral Reserves (MMT)
3
Social Optimum
4
Social Optimum (2)
5
Perfect Market
6
Monopoly
7
Monopoly (2)
8
Perfect Market v Monopoly
9
Sensitivity Analysis

• Higher interest rate Initial price will be
  lower, but price increase faster, and choke price
  reached earlier overall higher extraction
• Greater resource stock Initial price goes down,
  initial extraction goes up growth unaffected
  exhaustion postponed
• Higher demand Higher initial price, higher
  initial extraction price increase unaffected, so
  choke price reached earlier
• Lower choke price Final price lower, but price
  increase unaffected, so initial price must be
  lower overall higher extraction

10
Extraction costs

• Gross price increase slower
• Final gross price is choke price
• If the new gross price starts lower, it never
  picks up with the old it reaches the choke price
  later resource extraction must be greater during
  the entire period this cannot be
• Therefore, new gross price starts higher,
  extraction is lower, and exhaustion is reached
  later

11
Royalty and Revenue Taxes

• A royalty tax does not change extraction
• A royalty tax does redistribute revenue from
  firms to the government
• Subsidies are negative taxes
• A revenue tax is equivalent to increasing the
  extraction cost, that is, higher initial gross
  price, slower growth, exhaustion postponed

12
How Real is Hotelling?

• Hotellings rule has been derived for very simple
  economies
• So, either the analysis has to be made more
  complicated, or the data have to be manipulated
  before we can subject Hotelling to an empirical
  test
• Studies that have done either or both are
  inconclusive some say, Hotelling is real, others
  say not so
• It may be that markets assume that resource
  stocks are unfinite, until they are almost
  depleted