Steadystate growth in a hotelling model of resource. These will later be generalized in considering a series of cases taking on gradually some of the complexities of the actual situation. Environmental economics models are often too complex to be communicated in an illustrative manner. Volume iii focuses attention on depletable resources and energy resources. We assume functional forms for cost and demand so that the solution to the hotelling problem is a steadystate consistent with the empirical observation that the growth rates of market prices have remained zero over a long period of time. Hotellings 1931 classic model of exhaustible resource extraction as a drilling problem. It is thus safe to say that mainstream economics has neglected hotelling, at least his theory of. September 29, 1895 december 26, 1973 was an american mathematical statistician and an influential economic theorist, known for. A hotelling model with a ceiling on the stock of pollution. Dixon april 23, 2012 hotelling s rule is the observation that the exploitation of a nonrenewable resource can only be economically e cient if the resource owners marginal pro t increases at the prevailing discount rate. Volumes i and ii of the handbook of energy and natural resource economics deal with the economics of renewable and environmental resources, including biological resources. Environmental economics and natural resource management. The textbook model of commodity supply is a simple case in point.
These properties provide a way to represent the intensity of competition in the hotelling model. An experimental investigation of the hotelling rule econstor. The economics of exhaustible resources harold hotelling. Linear quadratic functions and normal distributions126. Policy implications in an environmental growth model with a. We have benefited from comments by philippe barla and seminar participants at the world congress of environmental and resource economists, the canadian resource and environmental economics meetings, and the universities of bristol and waterloo. Cynthia lina, gernot wagnerb aagricultural and resource economics, university of california at davis, one shields avenue, davis, ca 95616, usa. In political elections, the candidates have different valence characters which are known to the public. Dynamicmethods inenvironmentalandresource economics.
Product differentiation in exhaustible resource markets, journal of environmental economics and management, elsevier, vol. Framework for environmental economic decisionmaking 19 valuation of environmental costs and benefits 19. This figure presents a simulation of the trajectory for the marginal cost. Environmental economics attempts to find the cause of environmental problems and propose policies in terms of economics.
This is an advanced undergraduate textbook, assuming the reader to. The basic hotelling model of nonrenewable resource extraction. Hotelling s analysis is reexamined as the earliest source of theory in natural resource economics. Journal of environmental economics and management, 541. The significance of this study is its contribution to the testing of the hotelling rule as the theoretical framework of exhaustible resource economics. This paper presents an overview of the key economic results associated with the use of nonrenewable resources.
The lack of predictability is due to high volatility in resource prices, something hotellings rule does not account for. Journal of environmental economics and management 54 2007. Salantx november 27, 2016 abstract we show that oil production from existing wells in texas does not respond to oil prices, while drilling activity and costs respond strongly. As co2 levels have continued to rise, the 8th edition of this book is now more relevant than ever. An introduction to environmental economics and economic concepts unit information 3. Sections 4 and 5 deal with increasing and decreasing demand, respectively. Jul 01, 2007 this paper reexamines the hotelling model of optimal nonrenewable resource extraction in light of stock effects and technological progress. I develop a simple hotelling model which relates the distribution of consumer preferences to the intensity of competition. But they do have some flexibility in choosing a political stance or policy in the campaign. In general, capital is a basic building block in the production of goods and services, and therefore has economic value over time. Section 2 describes the hotelling model with an exogenous ceiling on the stock of pollution. On the economics of nonrenewable resources semantic scholar. The economics of exhaustible resources harold hotelling the. The model i will be using to explain the oil price path is based on a rule for dynamic efficiency which is often used in nonrenewable resource economics, the hotelling rule.
The hotelling model with multiple demands1 g erard gaudet stephen w. Hotellings law is an observation in economics that in many markets it is rational for producers to make their products as similar as possible. In the 1970s, academic economists started using hotelling s analytical framework, and natural resource economics began to gain importance as a research field with hotelling s rule at the heart of. Hotellings rule predicts price paths best when a short timespan is considered. For this reason, this paper develops the basic climate economic bce model that features core elements of macroeconomic and climate economic modelling, while allowing for an illustrative examination of the development path.
A hotelling model with pollution and learning by ujjayant chakravorty, andrew leach and michel moreaux1 abstract we study how environmental regulation in the form of a cap on aggregate emissions from a fossil fuel e. This paper evolved from the university of guelph phd dissertation of xianqiang zhang. Hotelling s 1931 classic model of exhaustible resource extraction as a drilling problem. Dixon april 23, 2012 hotellings rule is the observation that the exploitation of a nonrenewable resource can only be economically e cient if the resource owners marginal pro t increases at the prevailing discount rate.
This is also referred to as the principle of minimum differentiation as well as hotellings linear city model. Policy implications in an environmental growth model with a generalized hotelling depletion of nonrenewable resources. These drivers are then studied, individually as well as altogether, starting with the hotelling model. Steadystate growth in a hotelling model of resource extraction. Pdf on the empirical significance of the hotelling rule. Econ 370 hotelling model worksheet your father is a major coal mine owner. This paper examines which factors have an impact on the price of finite resources.
Early in the history of economic modeling, hotelling 1931 recognized the importance of. Hotellingfaustmann explanation of the structure of christmas. September 29, 1895 december 26, 1973 was an american mathematical statistician and an influential economic theorist, known for hotellings law, hotellings lemma, and hotellings rule in economics, as well as hotellings tsquared distribution in statistics. In the 1970s, academic economists started using hotellings analytical framework, and natural resource economics began to gain importance as a. The hotellings rule revisited in a dynamic general equilibrium model beatriz gaitan department of economics, hamburg university, germany richard s. Hotellings rule environmental economics ii spring 2014 lecture based in part on harris and roach 20 and field 2008 2. A celebration of environmental and resource economics. Cynthia lina, gernot wagnerb aagricultural and resource economics, university of california at davis, one shields avenue, davis, ca 95616, usa bharvard university, usa received 19 june 2006. Section 3 develops intuition by focusing on stationary demand. This paper reexamines the hotelling model of optimal nonrenewable resource extraction in light of stock effects and technological progress. This model has the distinct advantage to close the loop of environmental impact by including both resource use and residual emissions. Retaining the approach of the original edition, the newest iteration features global warming as the framing example for a comprehensive look at environmental economics. The model predictions are tested using the data on christmas tree prices in north carolina collected in december 1997.
A carbon tax has been widely discussed as a way of reducing fossil fuel use and mitigating climate change, generally in a static framework. We examine the relationship between a tree price and a tree age height using a hotellingfaustmann type model of optimal plantation management, which accounts for the possibility of replanting and biological growth. Tol research unit sustainability and global change, hamburg university and centre for marine and atmospheric sciences, hamburg, germany institute for environmental studies, vrije universiteit. A survey of hotellings 1931 model of resource extraction and tests of that theory seems particularly appropriate, since hotellings model has dominated the economics of exhaustible resources for many decades. To explain these facts, we reformulate hotellings 1931 classic model of exhaustible resource. A celebration of environmental and resource economics 9 the physical assetthe resourcewhich comes from the appreciation of its price, must equal the return on other forms of capital. The basic hotelling model of nonrenewable resource extraction predicts that the shadow price of a.
May 19, 2015 in this paper, we empirically examine whether the assumptions and predictions of the hotelling model are consistent with patterns observed in data. The application of the model in industrial economics is somehow limited, as only in a few settings prices charged. Pdf the intensity of competition in the hotelling model. Using panel data on fourteen nonrenewable natural resources. Spatial economics has emphasized location and distance. We examine the relationship between a tree price and a tree age height using a hotelling faustmann type model of optimal plantation management, which accounts for the possibility of replanting and biological growth. Hotelling model we say the market is covered if all consumers buy. The observation was made by harold hotelling 18951973 in the article stability in. Environmental policy 289 commandandcontrol regulations 290 incentivebased solutions 292 market approaches to automobile externalities around the world 292 tradable emissions rights. I impose two properties, mean preserving spread mps and monotone likelihood ratio property mlrp, on distribution functions. The ayreskneese model is an extension of the leontief pollutionabatement model.
Journal of environmental economics and management 54 2007 6883 steadystate growth in a hotelling model of resource extraction c. The model adds two matrices to account for the resources and wastes in physical units. Climate change has morphed from an environmental problem into a challenge to civilization itself. The hotellings rule revisited in a dynamic general. Hotelling revisited environmental science uc davis. We consider nonlinear functional forms for the extraction cost and resource demand to develop an empirical hotelling model with technological progress and stock dependent extraction costs. In this paper, we empirically examine whether the assumptions and predictions of the hotelling model are consistent with patterns observed in data.
The origins of the field of nonrenewable resource economics can be traced to harold hotellings the economics of exhaustible resources. This theory proposes that owners of nonrenewable resources will only produce a supply of their product if it will yield more than instruments available to them in the markets. The basic hotelling model of nonrenewable resource extraction predicts that the. Hotellings rule in the limit university of new mexico. Before explaining the model, i will start by making several unrealistic assumptions that will help simplify the analysis. Early in the history of economic modeling, hotelling 1931 recognized the importance of intertemporal issues for economic choices involving renewable and. Liviatan, notes on hotellings economics of exhaustible resources, can.
Livernois, 2009 notes that the hotelling model becomes complex. Jul 23, 2019 a carbon tax has been widely discussed as a way of reducing fossil fuel use and mitigating climate change, generally in a static framework. Pdf the hotelling rulethat price net of marginal cost must rise at the rate of. This is an advanced undergraduate textbook, assuming the reader to have a good knowledge of intermediate.
The model implies a modified hotelling rule for drilling revenues net of costs and. Linking economics and the environment 5 the role of environmental economics 5 recent developments 7 conventional project evaluation 7 national income accounts and macroeconomic performance 11 economywide policies and the environment 3. The paper finds that while the hotelling theory had contributed to the economics of nonrenewable resources and the rise of the conservationism movement, the assumptions laid out by the theory are not applicable to the real world. Economists have long been interested in the optimal depletion of nonrenewable re.
Environmental economics is often interpreted to include resource economics. Basic hypotheses in the economics of depletable energy supply the fundamental assumption underlying all of mainstream economic theory is that economic actors are motivated to make choices by the goal of maximizing some measure of economic returns. On transportation cost and product differentiation in. We shall assume always that the owner of an exhausti ble supply wishes to make the present value of all his future prof its a maximum. Apr 07, 2014 the paper presents a model of the hotelling rule and examines its applicability to real life phenomena. Environmental economics our economic activities production and consumption have an impact on the environment. Review of environmental economics and policy, volume 3, issue 1, winter. Salant2 july, 2014 1forthcoming in handbook on the economics of natural resources, eds robert halvorsen and dave layton, cheltenham, u. Cairns, in encyclopedia of energy, natural resource, and environmental economics, 20. Albers, in encyclopedia of energy, natural resource, and environmental economics, 20. Firstly, empirical and theoretical approaches used to study the development of resource prices are considered.
Natural resource economics under the rule of hotelling. Environmental economics an overview sciencedirect topics. Hotelling model worksheet answers econ 370 hotelling model. Environmental economics has developed as a branch of economics that is concerned with the economic analysis of the causes and the nature of environmental problems and their solutions. The basic hotelling model of resource depletion is discussed, followed by several extensions. Testing the assumptions and predictions of the hotelling model. This includes issues relating to markets as well as to public policy. Industrial organizationmatilde machado the hotelling model 7 4. The fundamental result is that scarcity rent rises at the discount rate, and that, at equilibrium, marginal benefits from extraction must equal the marginal economic cost. Environmental economics studies the effects that environmental systems have on the positive predictions and normative recommendations of economic models see solow, 1991. Shogren encyclopedia of life support systems eolss economic theory treats a nonrenewable resource as capital. It was first developed in 1931 by harold hotelling.