Hotelling's rule defines the net
price path as a function of time while maximizing
economic rent
In economics, economic rent is any payment to the owner of a factor of production in excess of the costs needed to bring that factor into production. In classical economics, economic rent is any payment made (including imputed value) or bene ...
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. 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.
This concept was the result of analysis of non-renewable
resource management
In organizational studies, resource management is the efficient and effective development of an organization's resources when they are needed. Such resources may include the financial resources, inventory, human skills, production resources, or ...
by
Harold Hotelling
Harold Hotelling (; September 29, 1895 – December 26, 1973) was an American mathematical statistician and an influential economic theorist, known for Hotelling's law, Hotelling's lemma, and Hotelling's rule in economics, as well as Hotelling ...
, published in the ''Journal of Political Economy'' in 1931, on the basis of his previous research on depreciation (see Hotelling 1925), which invites us to consider with caution the application of Hotelling's rule to concrete natural resources, in particular
fossil fuels
A fossil fuel is a flammable carbon compound- or hydrocarbon-containing material formed naturally in the Earth's crust from the buried remains of prehistoric organisms (animals, plants or microplanktons), a process that occurs within geologica ...
(coal, oil, gas).
Devarajan and Fisher note that a similar result was published by L. C. Gray in 1914, considering the case of a single mine owner.
The simple rule can be expressed by the equilibrium situation representing the optimal solution.
:
when ''P''(''t'') is the unit
profit
Profit may refer to:
Business and law
* Profit (accounting), the difference between the purchase price and the costs of bringing to market
* Profit (economics), normal profit and economic profit
* Profit (real property), a nonpossessory inter ...
at time ''t'' and δ is the discount rate.
The
economic rent
In economics, economic rent is any payment to the owner of a factor of production in excess of the costs needed to bring that factor into production. In classical economics, economic rent is any payment made (including imputed value) or bene ...
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. In other words, the resource rent is the resource royalty or resource's net price (price received from selling the resource minus costs. In this case costs are zero). The resource rent therefore equals the
shadow value of the natural resource or
natural capital.
See also
*
Economic rent
In economics, economic rent is any payment to the owner of a factor of production in excess of the costs needed to bring that factor into production. In classical economics, economic rent is any payment made (including imputed value) or bene ...
*
Ricardian equivalence
The Ricardian equivalence proposition (also known as the Ricardo–de Viti–Barro equivalence theorem) is an economic hypothesis holding that consumers are forward-looking and so internalize the government's budget constraint when making their co ...
*
Von Thünen rent
*
Faustmann's formula
*
Hartwick's rule
References
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Notes
{{Reflist
Eponyms in economics
Renting
Non-renewable resources
Resource economics