Speculation and Stability on Markets for Exhaustible Resources
The momentary stock equilibrium in the market for assets requires that the spot price of a unit stock rises with a rate equal to the rate of return of the numeraire asset (for simplicity we assume no costs of extraction). This equilibrium condition is often called the “Hotelling Rule”.
Given the momentary stock equilibrium, the resource owners are indifferent between selling the resource and acquiring the numeraire asset or holding the resource in the ground as an investment. This indifference of suppliers in turn permits that the rate of extraction is determined by the flow demand. We refer to this equilibrium between the rate of extraction and the competitive demand at the current price as the momentary flow equilibrium.
The intertemporal competitive equilibrium requires a correct initial price of the exhaustible resource. This initial price has to be set at a level at which the resource price can start to grow according to the Hotelling Rule so that ultimately demand dwindles to zero precisely at the time when the resource is exhausted. If a complete set of forward markets is assumed the intertemporal competitive equilibrium condition would certainly be satisfied.
KeywordsDition Librium Weinstein
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