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11.4: Resource Extraction
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- How much of a limited resource should be consumed today, and how much should be saved for future consumption?
- The Ramsey rule holds that, for resources in fixed supply, prices rise at the interest rate.
- With constant elasticity, consumption of a resource in fixed supply declines geometrically.
- Market arbitrage ensures the availability of the resource in the future and drives up the price to ration the good. The world runs out slowly, and the price of a resource in fixed supply rises on average at the interest rate.
- Substitutes mitigate the fixed supply aspect of natural resources; for example, fiber optic cable substitutes for copper.
- With an elasticity demand of two, compute the percentage of the resource that is used each year if the interest rate is 10%. If the interest rate falls, what happens to the proportion quantity used?