hotelling rule pdf

The assumption of exponentially increasing resource prices has also been tested. . ��=B�9�r5i�� UM��j�sO!w$D(v�)�D1Qt��tQ��bҹ�S�q��mp��E\�L��L}u�^H�$��>�r��E��ק?j��YGByk�盙�x�� 0000009471 00000 n 0000008691 00000 n 0000018993 00000 n This paper presents an evaluation or analysis of Harold Hotelling’s theory that asserts that the most socially and economically profitable extraction track of a non-renewable resource is one along which the price of the resource, determined by the marginal net revenue from the sale of the resource, increases at the rate of interest The paper presents a model of the Hotelling rule and examines its applicability to real life phenomena. HOTELLING'S MODEL Cournot's model assumes that the products of all the firms in the industry are identical, that is, all consumers view them as perfect substitutes. H��TMO�@��W� *�f��@�()H�^��S\%6�� ;k�D�8y�潙�]��W�KH8�NT�,n1�U�,��l��s�9אp�^1� ��_|�Z�<>�q�H�]LH�ON%�K�oٟd��?��@9'��zo��˘�!nPd"��!��$�D ��m {*��k��f ��$�I��x�ܐM=�Ͷ�i�ʋf5Mi�I�SnH�ӆ�� S��n��,Y�q�i�a�ɋ#'�a��P�ϼ� ��Ig.F�X��}��⊹�JKR~ܜ��s��慑�d�Go�3=R/��d�v�=Ө�C�� c�M��\J��UF�K�1,��)�=�~��6��4[�w��-�[�?��T�1�FSF�m�~ZI˔JϫW�P��7}�ژr>�X2M��6��A�"ɦ��wg��;��j�e��P>��Uޫ�� 90 0 obj<>stream x��Zk��FA"��Q�D��NwO�t�,�"��%ZY��R�,��1�҈��,��D1�eL��ʏ��! H�tT�n�0��+x쀍�D��9��J�!��Yֿ�6̬0`��N�k=¡��8}�SD��$B�9==ôo2��7��&��wr)�d�� b��a��A%L=�H��9�ia��+�+�E�(�:��K�y�W�40N�c�k��C{l��@�2�a��?�u�@c�M)4��}�c3��bzSu��2[-�w�;�4x�πe-�JA�R��L��'�F��eR��_/�4�E?�Yn=�|V-#�$�0�/&��n��3�� Comparative Static: Discount Factor What if the discount factor decreases (interest rate increases)? iv CONTENTS 4.7 Terms, study questions, and exercises . HOTELLING'S MODEL Cournot's model assumes that the products of all the firms in the industry are identical, that is, all consumers view them as perfect substitutes. "�Z �P��/?�hǡ��8H0��B�P��H��S�Ü�A�&��fK�\d)Ϸک�zO�V��0c��jg-b�eb��"�˘-&ܗ�,��!7}�Y�A�� u��B-p In fact, these two approaches to the price of oil are completely consistent. Nearly 90 years later, empirical tests conclude the rule lacks empirical validity, requiring strong amendments to describe the long‐term, aggregate behaviour of … Hotelling’s rule 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. Hotelling's Rule in the limit: an agent-based exploration of the model space David S. 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 owner's marginal pro t increases at the prevailing discount rate. Monopoly and the Rate of Extraction of Exhaustible Resources ," American Economic Review , American Economic Association, vol. 0000002126 00000 n 0000005812 00000 n That is, if resource allocation is efficient, We can also express (1) and (2) in continuous time terms as p(t) = (t) (3) and _ (t) = r: (4) If we set up the optimisation problem in a particular way (by specifying a Treat problems as opportunities to demonstrate service quality and the core principles of hoteling Mistakes will be made. . 0000005106 00000 n 0000001346 00000 n For n = 4, two players occupy 1/4 and two players occupy 3/4. Time consistency implies that if at a given time period t0, the decision maker sets a decision rule to be applied at some future period t1, when getting to the time period t1, the A more preferable test statistic is Hotelling’s $T^2$ and we will focus on this test. 0000002774 00000 n s10L9��Xl�6c�PBYC��E��&0P��h��u��;)|!u��D�B]"��!d%[� ��H �� D @� 8u/s 0 Hotelling's (1931) classic model of exhaustible resource extraction as a drilling problem: firms choose when to drill, but production from existing wells is constrained by reservoir pressure, which decays as oil is extracted. In a diagram, the Hotelling Rule can be shown as: Figure 2.1, Hotelling rule Where the price of oil P is on the vertical axis and time t is on the horizontal axis. . 5. To motivate Hotelling's $T^2$, consider the square of the t-statistic for testing a hypothesis regarding a univariate mean.Recall that under the null hypothesis t has a distribution with n-1 degrees of freedom.Now consider squaring this test statistic as shown below: 5 0 obj 0000003065 00000 n interest. 10 Clearly, in a seq uential-location game, there is one pure Nash equilibrium, where the second entrant 2006; Niehans, 1990). Hotelling Model We say the market is covered if all consumers buy. Stiglitz, Joseph E, 1976. " For n even number of players, the following is a pure strategy Nash equilibrium to Hotelling’s game. Comparative Static: Discount Factor What if the discount factor decreases (interest rate increases)? The Hotelling rule states that the nominal price of oil will increase at the nominal rate of interest. startxref So, for example, for n = 2, two players occupy the position 1/2. . This has been a perennial topic The Hotelling Rule—that price net of marginal cost must rise at the rate of interest in nonrenewable resource markets—forms the theoretical core of the economics of nonrenewable resources. After all, we also think that the price of oil is determined by demand and supply in a market. (This is the median voter theorem.) . Hotelling's rule states that the most socially and economically profitable extraction path of a non-renewable resource is one along which the price of the resource, determined by the marginal net revenue from the sale of the resource, increases at the rate of interest. endstream endobj 117 0 obj<>/W[1 1 1]/Type/XRef/Index[22 66]>>stream Journal of. Hotelling’s theory begins with the fundamental trade-off that the owner of the resource, say, oil, faces. 0000025972 00000 n Treat problems as opportunities to demonstrate service quality and the core principles of hoteling Mistakes will be made. The model implies a modified Hotelling rule for drilling revenues net of costs, explains why the production constraint typically binds, and rationalizes regional production peaks and observed patterns of prices, drilling, and production following demand and supply shocks. ” Hotelling’s ‘Economics of Exhaustible Resources’: Fifty Years Later”. et al. The Hotelling rule states that the nominal price of oil will increase at the nominal rate of interest. 0000001649 00000 n 1:��sA"�e!k{�_&��lP忨:�Co�`��ɀ�1��S.�Y��Ң%cV�l��\�}7�,v��s�҇��;��1��4�HD��+w9��MûI�D!d+x�`W�Ç,q@�M�*Jf��E#lKT��\<1��U�x)x��W�JYk�m�t�î��MBB�/15��gp�U[۪�/o�i�L3�V�� 9�u$]�5�``�!y۱�s�y6}�Vi��Z��ػG��Ů޿�}3��_�g2��W� s�� H�|U�n�0��+��H�@�y �! endstream endobj 103 0 obj<> endobj 104 0 obj<>stream model a là Hotelling (see T irole, 1988, p.297, for a discussion about this issue). This is the so-called Hotelling rule, the most well known result in natural resource economics. Harold Hotelling (1895–1973) who described the idea in an Economics Journal article, ‘Stability in competition’ (1929). endstream endobj 98 0 obj<> endobj 99 0 obj<>stream The analysis has been conducted through tests of variables like interest rates, time spans and extraction costs. . Hotelling assumed. 8579 How Does the EU ETS Reform Impact Allowance Prices? 0000000896 00000 n In other words, the owner can keep the oil as a interest. 0000006511 00000 n H�T��n�0�w��c� �! 0000000016 00000 n high service quality is politely applying the rules firmly and consistently. It describes the time path of natural resource extraction which maximizes the value of the resource stock. assessment of Hotelling’s rule in forecasting the crude oil prices. Rev Austrian Econ First, the user cost is the net present value of the future profit for the mine producing at the marginal production cost, which will be lost if it will extract an hotelping unit of mineral instead of leaving it in the ground. xref �VeBc��[�j'�dآ�K�#��p$u�D��J�j�}��N��e뮶��7��W��榵��ڵ �L��׾��+��3w��~��[�͵�=�={��W �9m��v|�e�ʺ�7\tժ|��?�^��|o��qK�� ο��o��{��,�z�֯�N?��W_�z�s�ꅅ3>��ۏ~��5'>��O�p��^�+ ��6��w?�t�ug^�a��)c�:o�-��I��n��>��a��4c��O{��g��Mý�}��`T��/x��g{�)�/L g��ҼG��|��8x��=_�l�W�8�Ǐ_}M'>��k�Y��6�ܽrņ��Ϝ�i��c�oY��I��M\4hψ3{~�Y��w�{��Gד��W�ܸfh�,��i�;W��k��mi[s~�{�zk� ��k��->q�]{~��f�_��^z㻟��g��,��;��5�ݲ��O�O{�9��}�h��n��vs�b�T �?�u-� ��^��Dr��(�P��#C�� i�@��yy�S�07�|B�T�q?n�[䅾��䆚�a�D��E�6��S��dkK��'�0!T��Ts�'k0�h�Ν�� a~�Dn��~(04�Tꆅ�( �0��0�I�,x��ӈ�NM��ƭGx4�{��Qj�! 5. This has been a perennial topic Harold Hotelling (1895–1973) who described the idea in an Economics Journal article, ‘Stability in competition’ (1929). endstream endobj 101 0 obj<>stream %%EOF Journal of. 88 0 obj <> endobj Hotelling's rule was named after American statistician Harold Hotelling. Hotelling's rule 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.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. extracted. 88 30 0 D$�4 trailer 0000008435 00000 n 16(1), pages 80-86, January. Why do competing politicians often hold similar views? Such decision rules must satisfy minimal rationality requirements, for example in most cases they should be time consistent. This is the so-called Hotelling rule, the most well known result in natural resource economics. If the value were to rise more quickly at the margin we shouldpostpone use. In fact, these two approaches to the price of oil are completely consistent. 0000004450 00000 n endstream endobj 102 0 obj<>stream Hotelling’s theory begins with the fundamental trade-off that the owner of the resource, say, oil, faces. 140 HAROLD HOTELLING ually downward to such short-time operations as crop carry- overs, this paper will be confined in scope to absolutely irre- placeable assets. ��\:l��v��v�� T^�(W�䍰��5��=J��i� V�Yj,8�C$�� Qss��~Qd�J��v�. Key Takeaways. 0000019507 00000 n In other words, the owner can keep the oil as a The results obtained show no general support for the Hotelling-rule’s ability to predict future prices. Respond quickly and professionally, admit Given the discount rate, the actual price path still depends on the initial price Po , as can be seen from the diagram. %PDF-1.4 %�� Respond quickly and professionally, admit However, it was Harold Hotelling (1931) who produced the defining treatise on natural resource management. %�쏢 This is also referred to as the principle of minimum differentiation as well as Hotelling's linear city model.The observation was made by Harold Hotelling (1895–1973) in the article "Stability in Competition" in Economic Journal in 1929. Hotelling's Theory defines the price at which the owner or a … Hotelling’s rule 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. Hotelling’s Law is also referred to as the principle of minimum differentiation or Hotelling’s linear city model. <> Hotelling Model 0 A 1 B xɶ pA pB Total cost to consumer x: p A+tx 2 pB+t(1-x)2 The equilibrium of the Hotelling model s Ui i Industrial Organization-Matilde Machado The Hotelling Model 8 4.2. If unanticipated, Hotelling rule no longer holds If anticipated, Hotelling rule holds and E 0 is lower while E 1 is higher than without demand growth. 0000007398 00000 n According to hHotelling rule, the value of natural is resources, if optimally used, must rise at the rate of interest. ” Hotelling’s ‘Economics of Exhaustible Resources’: Fifty Years Later”. 0000018762 00000 n The pricing relation in the box above is called Hotelling’s Rule. ֙��Q��z�H�}�^1L斬x�&� A�SM��d�Qq�0��. This is Hotelling™s Rule, which, in its simplest form, we expressed in continuous time as p_ p(t) = r; where p(t) is the price (value) of the resource. !�K;0�G�v�p�J��}C��@�� +��R�;� Hotelling’s rule states that the. . . 66(4), pages 655-661, September. ��Z��*��AC(��r�j��Wۼ�X�n�,اK΋�ம�~�ݶhݻH,��]�Z��Z�V�J�&GF�[�� S�� x�b```f`` g`e`�Oa�g@ ~�+��q-J��r�|~��%3:��{�>(�5 ��2:��qZ�fR2��h�� Our results suggest that x�bb``b``� � yO � "A note on uncertainty and the hotelling rule," Journal of Environmental Economics and Management, Elsevier, vol. The real test is how you react to them. 0000010161 00000 n The rule says that a unit of resource extracted in any period should yield the same rent, in present value terms. 0000008734 00000 n The analysis has been conducted through tests of variables like interest rates, time spans and extraction costs. 0000002643 00000 n endstream endobj 100 0 obj<>stream Why are gas stations always built close together? . Hotelling’s rule states that the. Both paths in fact satisfy the Hotelling rule. . Adding a stock effect to the classic Hotelling model causes shadow prices to rise less slowly than the rate of interest, but market prices still increase over time [11]. H�tT�n�0��+��H��8�P�sQd:V�H�D'M��K[M�U0a�;��{��ڎ��i�s�4H�Џ ADe��T=�N��m�rM Industrial Organization-Matilde Machado The Hotelling Model 7 4.2. 0000003304 00000 n . 0000001789 00000 n high service quality is politely applying the rules firmly and consistently. It is a very useful model in that it enables us to prove in a simple way such claims as: “the larger the … The owner can leave the oil in the ground indefinitely or extract and sell it right away and then purchase a financial asset with the proceeds. Our results suggest that That is, if resource allocation is efficient, Z��c7OD�͓��[��k��t��7�,bU�9|��Qs�d��斨��:7��cN��Qss��斨��:7zx�3��qs��5 ��y*깤�&?�Ǹ�1n~�r��QMĘ ��y�W�L��J�.�6�X��T��mJ�[ev!0D�ْ6��Ӧk�V8�#l�kL�k�9r�$�"A�#�XRLDL�_�K�!9�4�(~UT��*��cU%ek��6��3৾Ld�|�ٛ�V�f 0Rn`�Gru�H��k��WH��1x��r2�n�P��V�y�՜�+��3��OWT�MɊK�j}��5R#�}dKy}��`�>"��L��c�J]�9J�+)\Ml4�\�u��Z�I�z�ݕ�@c2��X��*��ʩY#��tkf��=�+KX�P��L,�D!��\�?�!B:6��2P��h +��R�q��'��!R3�*6T̃$��n��Ę�A�ˤWS69��2 c��:�Qo�d2)=�� w�N7A:��%/��ʍD2 ۵q��_e�*��wY endstream endobj 89 0 obj<>/OCGs[91 0 R]>>/PieceInfo<>>>/LastModified(D:20050207155450)/MarkInfo<>>> endobj 91 0 obj<>/PageElement<>>>>> endobj 92 0 obj<>/ProcSet[/PDF/Text]/ExtGState<>/Properties<>>>/StructParents 0>> endobj 93 0 obj<> endobj 94 0 obj<> endobj 95 0 obj<> endobj 96 0 obj<> endobj 97 0 obj<>stream In a diagram, the Hotelling Rule can be shown as: Figure 2.1, Hotelling rule Where the price of oil P is on the vertical axis and time t is on the horizontal axis. . H�tT�n1��+xL�T��w$(��f-��ؒ��KmK�؃x8rH>��z� To motivate Hotelling's $T^2$, consider the square of the t-statistic for testing a hypothesis regarding a univariate mean.Recall that under the null hypothesis t has a distribution with n-1 degrees of freedom.Now consider squaring this test statistic as shown below: The owner can leave the oil in the ground indefinitely or extract and sell it right away and then purchase a financial asset with the proceeds. Exactly two players choose each of these locations: 1/n, 3/n, …, (n-1)/n. The Role of Myopia, Hedging Requirements and the Hotelling Rule Abstract This paper uses a discrete-time partial equilibrium model of the European Emissions Trading System (EU ETS) to analyze the impact of the recent reform on allowance prices. <<726bf9089c15f042983585419367f6b8>]>> It is a very useful model in that it enables us to prove in a simple way such claims as: “the larger the … The results obtained show no general support for the Hotelling-rule’s ability to predict future prices. 0000003657 00000 n Hotelling’s analysis thus far showed that competitive pricing would lead to r P P t '( ) where this differential equation has a terminal condition given implicitly by q(P(T),T) 0 This determines P o and the future path of P(t). %PDF-1.4 A short video explaining Hotelling's Law. )��)TDK�x� _�B�@L#�`G��4ʍ��3��C�� ؚ0T�F�!�9$m�7V�{�Gp�˘W��bp�$��F�6��%�ʀrq�&�Y�HVW. Both paths in fact satisfy the Hotelling rule. Hotelling's law is an observation in economics that in many markets it is rational for producers to make their products as similar as possible. Hotelling's Rule in the limit: an agent-based exploration of the model space David S. 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 owner's marginal pro t increases at the prevailing discount rate. A second important reason for why the Hotelling rule may not adequately describe the actual behavior of world mineral prices is technological progress. This seems a little bit mysterious. Harold Hotelling's 1931 contribution is known for providing a basic principle—the Hotelling rule—to the economics of non‐renewable resources. A more preferable test statistic is Hotelling’s $T^2$ and we will focus on this test. After all, we also think that the price of oil is determined by demand and supply in a market. Economists have long been concerned with the extraction of natural resources. T�|q��o�U�z��%��Fԛ]�"��A�J*u w&�:5S��N�\��Lu�k��).wj.��թ�Ľ�� M��;��1#N9��SG�y��W͝Y�}լ+缱c��{_�[��!J�� 3�wv,]�U��}��O>�ġ��u��-_��Z7mڌ��ӧ�[��\Z�Β��#!�x��ǉ� WJ�JBDd2ON�_�� 4b��T�gHlQ�5b��ē��&@��(� ��#�{$�3$�Wl�W^��-۶m{y��'��(�>Ԑ��[�Ȉ�"B��\#�qc��N(u"��K�� q�6dh1��D��$�N This seems a little bit mysterious. The behavior of commodity prices reveals the stylized facts of extreme volatility, skewed distribution, and high degree of price autocorrelation as discussed in Deaton and Laroque (1992). The model implies a modified Hotelling rule for drilling revenues net of costs, explains why the production constraint typically binds, and rationalizes regional production peaks and observed patterns of prices, drilling, and production following demand and supply shocks. The model implies a modified Hotelling rule for drilling revenues net of costs and Firms extract more now, less later. 0000006730 00000 n . Given the discount rate, the actual price path still depends on the initial price Po , as can be seen from the diagram. 0000008079 00000 n Hotelling assumed. T… If unanticipated, Hotelling rule no longer holds If anticipated, Hotelling rule holds and E 0 is lower while E 1 is higher than without demand growth. gC��&SA�C��$��I��kKO��)�L�J �l�T�k�݆x��{��e�-�B��w�1�i��U]ߕ��mw��cnHG�ċ�z��t ��h��x��IkH�� x� 140 HAROLD HOTELLING ually downward to such short-time operations as crop carry- overs, this paper will be confined in scope to absolutely irre- placeable assets. The rule says that a unit of resource extracted in any period should yield the same rent, in present value terms. The real test is how you react to them. CESifo Working Paper No. The assumption of exponentially increasing resource prices has also been tested. Hotelling was the first to use a line segment to represent both the product that is sold and the preferences of the consumers who are buying the products. stream �>z:��c�^��m*�N�l�c�}9�-F!j��.�4��G��R��(�4��;�c�R��m��D"��^`��)�:��J�ʰ�E��5�X�. 0000001178 00000 n Hotelling’s Law is also referred to as the principle of minimum differentiation or Hotelling’s linear city model. Firms extract more now, less later. }�E^Q�B#�n��GȏB� 0000019244 00000 n Hotelling’s rule. 0000003733 00000 n @�E�-��Jr��}�r�F۸��A8��y�m��yu�L`A2!�6B��0 �Hf�Д��0ǂW�؏i�c�N�R7w�� 4G��!x$�()f��o�m�M`�c`��,�Ǉ��m��Uo��>t��K��/Ǹ�(5m��Nι��]p��0AW�� gJ� ��"�qJS�g9��P��H�ie�b�;��VF��kE�Z3��1Kh�$0��,q�ҝ�MP笗)�Rs�O�H)�`�zE�-�9�w��R�ڔS��8A;��/��K�=)�S��@P�Me��ق�$=��*��Cڥ'��qo8�8$��^׈.y1J%G\�8�١O�"a��9s!H{��65lSFڮ��Y�C�zx��7��z��znnn��o��i��)gJ�nl�L�닔ŉ� N��s.h� ݀��#K�4��(Kʪ�w�0`��d��ґ��,�Yօ �4��2ik>�8�� \�:�Ln +�3��!�綣��"�-� �܇ (��*,S�Ji�| j��====w��B$)غ�>ݧ��>_�,qa7�?I��,q \��Y�9!�[c�ЀǢ�M��"��c��wCF��"�܎&�y�3K[Jf��/��dvkf�ok)p/��|��}"�(g�v�͝\pjfG.¾`n�֖ȥ��8�)�[hsr�y��Υ僈�X ��b��Hx�ŬT�=J� p1�`;>G��_A@��+��-F$��P J b��h��U��Fh�e�{�2�� 6��H�E��I��ix�]=�"� B�� 4}��ŏM��~�\gX��xAV�]..��Ѕ-�+r5ƅ/o��x'��Q"�3V��ژ�-��{[]��k9j�Y[��I�zO)y-�=c�g2�Ӿq��GN��E댔|m�54��q(�Z�~��8�~��\^^��W�꼪��,��R%ä�F#�s��Ґ��[c��iH�mz��ꉹ;eNfˌ��Mљ3�)��~��e��م�ì^9^1��/h�6� ��h}�U:f��FH��㸈�U"z��8,��۾;�r^��XQ8ڡ��F��/L]Q��g��z-"��^��>�.=��Z�O��hۍg��"H��Ak�B�HC7��]�ێa��g�p��˖��^x��W��]�_��642��y(��S��i�:�A��piY�.�_ D�� … Hotelling ’ s Law is also referred to as the principle of minimum differentiation or Hotelling ’ Law. 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