Sustainability criterion implied externality pricing for resource extraction

Daniel Grainger

Economics Letters, 2024, vol. 234, issue C

Abstract: A dynamic model is constructed that generalises the Hartwick and Van Long (2020) endogenous discounting setup by introducing externalities and asks what implications this has for optimal natural resource extraction with constant consumption. It is shown that a modified form of the Hotelling and Hartwick rule holds in which the externality component of price is a specific function of the instantaneous user costs and cross price elasticities. It is demonstrated that the externality adjusted marginal user cost of remaining natural reserves is equal to the marginal user cost of extracted resources invested in human-made reproducible capital. This lends itself to a discrete form with a readily intuitive economic interpretation that illuminates the stepwise impact of externality pricing on optimal extraction schedules.

Keywords: Externalities; Sustainability; Natural resources; Optimal extraction; Hotelling's rule; Hartwick's rule (search for similar items in EconPapers)
JEL-codes: D62 O44 Q01 Q20 Q32 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:234:y:2024:i:c:s0165176523004743

DOI: 10.1016/j.econlet.2023.111448

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