ABSTRACT
Nonrenewable resources can be used in the present or conserved for future use. Economic theory offers some guidance concerning the optimal way to allocate nonrenewable resources over time. In essence, the net value gained from using a 133resource today must be balanced against the net value of its potential future use. To compare values across time periods, we use a discount rate to measure the present value of future consumption.
The concept of user costs captures the idea that by using resources today, we impose some cost on future potential consumers. User cost is kind of an externality in time and, like other externalities, should be reflected in market prices to internalize all social costs. Including user costs in market prices will reduce consumption today, leaving more for future use.
If resource owners accurately foresee future resource shortages, current prices will reflect user costs. The expectation that prices will rise creates an incentive to hold resources off the market today, in order to sell them at a higher net price in the future. According to Hotelling’s rule, in equilibrium the net price of a resource (market price minus extraction costs) must rise at a rate equal to the rate of interest. The higher the interest rate, the more likely the owner is to profit from extracting and selling a nonrenewable resource today rather than waiting for higher prices in the future.
When considering long periods, discounting reduces the significance of user costs almost to zero and creates little market incentive for conserving nonrenewable resources. If governments wish to ensure a long-term supply of certain resources, they can internalize user costs through a resource depletion tax—much as a Pigovian tax can be used to internalize current externalities.
The alternative may be to exploit nonrenewable resources to exhaustion, leaving no reserves for future use. A major question is whether it is appropriate to use current discount rates to determine the allocation of resources over the long term, or whether there is a social obligation to conserve resources for future generations.
