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      Question

      State Hotelling's Rule (or the Hotelling Principle) for

      the extraction of a non-renewable resource. What is the economic significance of the "user cost" (or scarcity rent) in this rule?
      A The price of the resource should always remain constant over time. Correct Answer Incorrect Answer
      B The marginal cost of extraction should increase exponentially over time. Correct Answer Incorrect Answer
      C The total quantity extracted must be equal to the initial stock of the resource. Correct Answer Incorrect Answer
      D The net price (or scarcity rent/user cost) of the resource should rise at a rate equal to the rate of interest (r) in a competitive market. Correct Answer Incorrect Answer

      Solution

      Solution: Hotelling's Rule (1931) states that the price of a non-renewable resource, minus the marginal cost of extraction (the net price, or scarcity rent/user cost), must grow at the rate of discount (r) for resource owners to be indifferent between extracting today and extracting tomorrow. The User Cost is the opportunity cost of using the resource today instead of saving it for future, more valuable use; its rising price reflects the increasing scarcity over time.

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