Hotelling's rule

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Not to be confused with Hotelling's law.
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Hotelling's rule is defining the net price path as a function of time while maximising rent in the time of fully extracting a non-renewable natural resource. The maximum rent is also known as Hotelling rent or scarcity rent and is the maximum rent that could be obtained while emptying the stock resource.

Hotelling's rule is the result of analysis of non-renewable resource management by Harold Hotelling, published in the Journal of Political Economy in 1931. A similar result was published by L. C. Gray in 1914, considering the case of a single mine owner. Hotelling's result shows that in an efficient exploitation of a non-renewable and non-augmentable resource, the percentage change in net-price per unit of time should equal the discount rate in order to maximise the present value of the resource capital over the extraction period.

The simple rule can be expressed by the equilibrium situation representing the optimal solution.

\frac {P'(t)}{P(t)} = \delta,

when P(t) is the unit profit at time t and δ is the discount rate.

The economic rent obtained is an abnormal rent, often referred to as resource rent, since it generates from a situation where the resource owner has open access to the resource for free. The resource rent therefore equals the shadow value of the natural resource or natural capital.

The concept of resource rent also includes biological and other renewable resources.

[edit] References

  • S. Devarajan and A. C. Fisher, (1981). Hotelling's "Economics of Exhaustible Resources": Fifty Years Later. Journal of Economic Literature, Vol. 19(1):65-73.
  • L. C. Gray, (1914). Rent under the Assumption of Exhaustibility. Quart. J. Econ., Vol 28:466-489.
  • H. Hotelling, (1931). The Economics of Exhaustible Resources. J. Polit. Econ., Vol. 39:137-175.

[edit] See also