Ecology, Environment and Conservation Paper

APPLICATION OF HOTELLIN 'S ECONOMIC THEORY OF EXTRACTION OF EXHAUSTIBLE RESOURCES TO THE MINERAL FIRM

Francis D. Udoh

Abstract

This paper presents some extensions of Hotelling's fundamental economic theory of extraction of exhaustible resources as applied to the mining firm. The optimal rate of depletion is applied to the operation of a single mine as in Gray (1914) and Scott (1967). The equilibrium rule by which the firm would allocate production to one period rather than another as a function of the rate of interest is described and what happens when the rate of interest rises is shown.The equilibrium path of prices, given demand, to exhaustion as in Hotelling (1931) and Herfindahl (1967) are also described. Some theoretical and empirical issues pertaining to the theory of exhaustion as an operational tool of significance to mineral companies are discussed.