At equilibrium, the yearly rate of increase in the price of a nonrenewable natural resource will equal the rate of return on investments of equivalent risk.

Question

Quizplus · Accepted Answer

This is known as the Hotelling's rule and it states that the price of a nonrenewable resource will increase at a rate equal to the rate of interest, as long as extraction costs and demand remain constant. This is because the owners of the resource will prefer to leave a portion of the resource in the ground, rather than selling it at a lower price, and earning a lower return on their investment.

At Equilibrium, the Yearly Rate of Increase in the Price