Question

In the context of optimal depletion of resources, describe the condition referred to as the hotelling condition

Answer 1

Hotellings rule — > It defines the net price path as a function of time while maximizing economic rent in the time of fully extracting a non renewable natural resource.


In hotellings rule, there are assumptions made :

1.) There is a micro analysis of the exhaustible resource for example coal.

2.) The price of the resource is known by the mine owner.

3.) The extraction cost remains constant even as the mineral gets exhausted.

4.) There is no considerable change or improvement of technology or the mining method.

5.) The marginal cost remains unchanged.

6.) There is a perfect foresight regarding future costs, demand and prices so there is no room for uncertainty.

7.) The mine owner is aware of the stock reserves of the non renewable resource.

8.) There is constant extraction cost as the mineral gets depleted, extraction cost do not rise.

In hotelling rule we have hotelling rent also known as user cost.

It is the opportunity cost of postponing extraction of a non renewable resource.

If the mineral is extracted now, the present profit will be earned but there will be a depletion in the mineral.

If the mining is postponed then the profits can be gained in the future.

User cost is thus the present value of the marginal profits from selling the resource at a future time.

This gives the future amount expected from a resource when the mining is done in future rather than doing it now.

In hotellings rule there are conditions for optimal depletion of the exhaustible resource.

These conditions are :

A.) In percentage , equilibrium exists when the price is equal to marginal cost.

B.) The case of NRR (Net Production Rate) the price equals Augumented user cost and equals to marginal cost plus User cost.

C.) Postponing extraction of the resource for the future involves preference of time.

D.) The future price should exceed present price of extraction to provide compensation for the loss of present earnings resulting from conservation.

Answer 2

The condition referred to as the hotelling condition are seen in cases of depletion of resources.

Explanation:

• Hoteling was an American economist who gave the Hotelling's theory, or rule states that owners of the non-renewable resources will produce or make a supply of basic commodity it can give more than required financial gains.  

• This theory aims to address the fundamental decisions for the owner of a non-renewable resource.

• The increase in prices of non-renewable resources like oil, copper, local, and zinc should be tracked as the pace of real interest rate increases.

• The theory is based on the price in U.S treasury bonds or interest securities.

Learn more about the context of optimal depletion of resources, describe the condition referred to as the hotelling condition.

• brainly.in/question/3328070 answered by danielochich.