Académique Documents
Professionnel Documents
Culture Documents
Introduction
Natural Resource Theory is the
economic theory of exhaustible and
renewable resources. These
resources last for more than one
period of time and so function as a
type of capital. They are also used
for food, fiber and energy and so
function as ordinary goods
Exhaustible Resource
Oil, Coal, etc.
Old growth trees
These provide value by being used
up.
Hotellings Model: 3
Equations
1. Capital Market Equilibrium
2. Feasibility
3. Flow Market Equilibria.
Capital Gains
Stock can also have capital gain: its price
goes up.
All Exhaustible Nat Resource returns must
come from price change
Period 1
have $P(1)
have $P(1)
worth of
resource
Period 2
have $(1+r)
P(1)
have $P(2)
worth of
resource
so
When is it a good idea to by the
resource?
when p(2) >= (1+r) p(1)
If >, then everyone would want the
resource and nobody would want anything
else in their portfolio.
If <, then nobody would want the resource
$/M B F
300
250
200
150
100
50
0
53
55
57
59
61
63
65
67 69
year
71
73
75
77
79
81
83
p=p0(1+r)t,wherep0isinitialprice
Q(t)=D(p(t),h).
SO
Q(t)=D(p0(1+r)t,h).
D( p (1 r ) , h)
t
t o ,T
Left Over
Why is it equality?
Why not >
Why not <
Not so far fetched. Suppose global
warming bites and we give up coal
mining. What will coal then be worth?
D( p (1 r ) , h)
t
t o ,T
The solution
t o ,T
D ( p0 (1 r )t , h)
Backstop
Linear demand curve (and any other one
that hits the axis) has a choke price.
Choke price is the price that chokes off
demand for the resource.
At choke price some other technology is
used to meet demand (e.g. coal instead of
oil.)
P0 (1+r)T= Choke
If you know p0, and choke, you know T,
exhaustion time.
Hotelling in 4-Quadrants
Note: choke price, T.
demand
P0(1+r)t
p
q
450 line
Hotelling in 4-Quadrants
demand
P0 ert
p
q
450 line
P0 ert
p
q
450 line
A choice of Po below
Too Low a
P0
demand
p
p
450 line
Increase in r
Red Bounded area must
p
equal green area
Initial price lower
T sooner
p
Two Price-time paths
p 0
must
q cross
0
450 line
P0 ert
Enhancement: Lowering
X(0)
p
Red price path is
result of red X(0)
Arrow shows size
of enhancement
450 line
p
0
P0 ert
p
0
Recall
X t
D( p (1 r ) , h)
j
j t ,T
q(t )
p(x(t)
) = p0(1+r)(t+n)
Enhancement: Years
Method
p
X(0) is again red area.
Arrow shows numberpof
years need to wait to
0
find equivalent
450 line
P0 ert
p
0
Value of Enhancement
The 1978 Park taking was 1.4billion
board feet, which is the equivalent of
2.26 years of cutting.
price 1978, was $311 per MBF.
real interest rate7 percent
2.26years at 7percent real per year
or 17percent of price
Conclusion
Govt paid $689 million for second
take
enhancement was $583 million
Therefore the US paid nearly twice
for the park
Example: Q = p
x 0 Q(p 0 e rt )dt.
0
x 0 p e
-
0
- rt
dt.
- rt
e
x 0 p
r
-
0
-
0
Example Concluded:
Reduced Form
- rt
e
x 0 p
r
-
0
-
0
p 0
r x 0