Is there a difference between the price of oil in the market for oil and the price of reserves…

1. (a) Is there a difference between the price of oil in the market for oil and the price of reserves in the market for reserves? Explain. (b) What is the Hotelling Rule? (c) Does it assume profit maximization by owners of oil deposits? (d) What does it imply about the price at which oil is sold over time? (e) How would you expect non-renewable resource by a monopolist to differ from extraction by a price-taking firm? (f) With a pollution externality, Pigou demonstrated that the presence of a harmful real externality leads private decision making by a profit-maximizing firm to generate an outcome that is not socially optimal. Is that also the case with the inter-temporal externality associated with extraction of this non-renewable resource – is the profit maximizing extraction also not socially optimal? Explain. (g) Is socially optimal extraction of a non-renewable resource sustainable? Lecture: Non-Renewable Resources – Economics of oil 2 (a) A non-renewable resource firms owns two deposits of copper, where the potential amount of copper in the deposits are the same but one is located at a shallower depth and has a lower cost of extraction. How should it exploit those two resources? Should it extract some copper from each deposit every year, or should it do something different? Describe the extraction strategy it should employ, and the underlying economic rationale. (b) Has the world price of oil risen, from 2000 to now, approximately at the interest rate, as a simple version of the Hotelling rule would suggest? (e) If not, why not? What factors could explain this?


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