Handbook on the Economics of Natural Resources
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Handbook on the Economics of Natural Resources

Edited by Robert Halvorsen and David F. Layton

The topics discussed in the Handbook on the Economics of Natural Resources are essential for those looking to understand how best to use and conserve the resources that form the foundation for human well-being. These include nonrenewable resources, modeling of biological resources, conservation of biological resources and water resources. The expert contributors of this Handbook provide solutions to many of the problems that growing populations now face, and sketch the likely future developments in the field of natural resource economics whilst paving the way for new thinking.
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Chapter 2: The Hotelling model with multiple demands

Gérard Gaudet and Stephen W. Salant

Extract

The purpose of this chapter is to provide an elementary introduction to the nonrenewable resource model with multiple demands. The theoretical literature following Hotelling (1931) assumed that each grade of a resource can be shipped to users all over the world at the same cost; that all users are subject to the same taxes and regulations; and that motorists can switch as easily from liquid fossil fuels to coal as electric utilities can. As Herfindahl (1967) showed, these assumptions imply that in competitive equilibrium all users will exhaust a lower-cost resource completely before beginning to extract a higher-cost resource; moreover, users will switch to this higher-cost resource at the same moment, so simultaneous extraction of different grades of oil or of oil and coal will never occur. That is, Herfindahl’s conclusion about the order of extraction follows from his assumption of a single demand curve.

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