learning objectivesAfter reading this chapter you will be familiar with the following:
• basic features of nonrenewable resources;
• the problems of assessing the future availability of nonrenewable resource stocks;
• the hypothesis of smooth tonnage grade and its implications;
• the conditions for the optimal intertemporal allocation of nonrenewable resources;
• the user cost as intergenerational externality and the policy implications thereof;
• the time path of nonrenewable resource prices;
• the Hotelling rule;
• the optimal price path and resource exhaustion in a perfectly competitive market setting and with perfect foresight about future resource conditions;
• nonrenewable resource prices and extraction rates in the less than perfect world;
• the notion of backstop technology: its implications for resource exhaustion and economic growth.
When people question the adequacy of existing market arrangements for the intertemporal allocation of natural resources, they are basically raising questions of the appropriate definition and consideration of user costs.