AP MicroeconomicsEnvironmental Economics
Hotelling's Rule
Hotelling's rule states that, for efficient extraction of a nonrenewable resource, its net price (price minus marginal extraction cost) should rise over time at the rate of interest.
An owner of a finite resource like oil chooses between extracting now and selling, or leaving it in the ground as an asset. In equilibrium the in-ground 'scarcity rent' must grow at the interest rate; otherwise owners would shift extraction to earn a higher return elsewhere. This predicts that scarcity rents (and resource prices, absent cost or technology changes) rise over time, and it provides a benchmark for sustainable depletion of exhaustible resources.
Formula / Example
(P_t - MC) grows at rate r: net priceₙ₊₁ = net priceₙ × (1 + r)