Natural Resource Extraction in a Federation

Robin Boadway, Motohiro Sato and Jean-François Tremblay

FinanzArchiv: Public Finance Analysis, 2018, vol. 74, issue 1, 34-51

Abstract: We analyze a natural resource extraction problem in a two-region economy with mobile labour. One region produces manufacturing goods while the other produces agriculture and extracts a non-renewable resource. Manufacturing production exhibits increasing returns-to-scale if the production level is sufficiently high. There are multiple long-run equilibrium labour allocations towards which the economy may converge. Under decentralized resource management, a tendency to over-extract the resource relative to the federal optimum makes convergence to a low-income equilibrium more likely. Optimal extraction from the federation's perspective satisfies a modified Hotelling's rule that takes into account the impact of resource extraction on manufacturing production.

Keywords: natural resource extraction; decentralization; inter-regional mobility (search for similar items in EconPapers)
JEL-codes: H70 Q32 Q33 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Natural Resource Extraction in a Federation (2017)
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DOI: 10.1628/001522118X15109346479939

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