Nonrenewable Resources, Strategic Behavior and the Hotelling Rule: An Experiment
- Roel van Veldhuizen, Joep Sonnemans, Roel van Veldhuizenand
The aim of the paper is to determine how profiles of annual extraction volumes would have differed under alternative policy objectives, conditional on optimizing behaviour and perfect knowledge about assumed future demand and supply functions, and the extent of the phosphate reserves. Three dynamic optimisation problems are formulated and solved for the following three objective functions, with respect to annual extraction, subject total amount mined being less than or equal to the initial stock: (A) maximising the present value of rents from extraction (returns to Nauru only); (B) maximising the present value of the sum of extraction rents and consumer surpluses (returns to Nauru, Britain, Australia and New Zealand combined); and (C) maximising the present value of the sums of extraction rents and consumer surpluses for the years before independence, and extraction rents only for the years after independence. Optimal extraction paths and values for all three objective functions are presented for each of the three models, and compared with corresponding values for the actual extraction profile over time. Sensitivity analysis is conducted for inelastic and elastic demand for phosphate schedules.