On the extraction of an exhaustible resource by a monopoly (Q1072920)

Hotelling's r-percent rule does not hold for monopoly extractors of durable exhaustible resources. An example with a nondurable resource in which the rule also fails to hold is presented. An economy with a fixed average propensity to save is modelled. The monopoly extractor recognizes that resource extraction, by affecting output and hence capital accumulation, affects future demand. The firm exploits this effect by causing the marginal profitability of extraction to grow faster or slower than the rate of interest, depending upon initial conditions. Conditions are developed under which the growth rate will be less than the interest rate.