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?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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