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Natural Resource Extraction in a Federation

Robin Boadway (), Motohiro Sato () and Jean-François Tremblay ()
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Motohiro Sato: Hitotsubashi University, Japan

No 1714E, Working Papers from University of Ottawa, Department of Economics

Abstract: We analyze a natural resource extraction problem in a two-region economy with mobile labour. One of the regions produces only manufacturing goods while the other produces agriculture and extracts a nonrenewable natural resource. The manufacturing sector exhibits increasing returns-to-scale if the level of production is sufficiently high. There are multiple equilibrium allocations of labour towards which the economy may converge in the long-run depending on the initial stock of natural resource and the initial distribution of labour. Under decentralized resource management, there is a tendency to over-extract the resource relative to the constrained federal optimum, which tends to enlarge the set of initial conditions under which the economy converges to the low-income equilibrium. The optimal path of extraction from the perspective of the federation 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)
New Economics Papers: this item is included in nep-env
Date: 2017
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