ABSTRACT
Nordhaus (1973) has in his seminal contribution addressed two emerging questions in the field of energy economics. First, how do current market prices of natural resources reflect true scarcity from a theoretical perspective? He shows that the absence of complete markets implies that discount rates are critical as myopic agents are not kept in check and the instability in spot market prices will cause suboptimal resource extraction rates. More succinctly, ‘markets in their current form may be unreliable ways to allocate exhaustible resources’ (p. 537). Second, how well do current prices of resources empirically reflect true scarcity? Nordhaus (1973, p. 537) rightly states that ‘unfortunately, an estimate of whether current usage is too fast or too slow can emerge only from a carefully constructed econometric and engineering model of the economy’. He then proceeds to lay out such a carefully constructed model, solve it, and draw out a large number of conclusions.
