Notes on Hotelling's Economics of Exhaustible Resources

Abstract

Notes on Hotelling's economics of exhaustible resources. The paper provides some extensions of Hotelling's fundamental paper on the economic theory of exhaustible resources. One of the main modifications introduced in this paper concerns the assumption of complete versus incomplete exhaustion of the resource. Under com- plete exhaustion the concept of 'full marginal cost' must include a term which re- flects the alternative cost of producting an extra unit at the terminal time. Under incomplete exhaustion this term vanishes. To derive these results, we present a novel formula for the 'full marginal cost' of extracting exhaustible resources. The principle that marginal profit has to increase over time exponentially at a rate equal to the rate of interest (r per cent rule) is shown to be valid only under special conditions. The modifications to this rule are discussed. Notes sur le memoire d'Hotelling intitule 'The economics of exhaustible Resources.' Cet article propose certains complements au celebre memoire d'Hotelling sur la theorie economique des ressources epuisables. L'une des principales modifications introduites par les auteurs a trait a la nature de l'epuisement: alors qu'Hotelling postule l'epuisement complet, il semble plus naturel de postuler un epuisement in- complet des ressources 'a cause (les coihts croissants de l'extraction. Les auteurs montrent que l'on peut s'attendre a des resultats qualitativement differents et a des interpretations differentes du cout marginal selon le contenu des postulats de base quant a la nature de l'epuisement.