Learning by Burning

Abstract

This paper presents a model of optimal natural resource depletion with endogeneous technical progress. The form of technical progress chosen is that of learning by doing in the use of the natural resource. The model is outlined and necessary conditions for optimality are obtained and interpreted. The principal object of the analysis is to discuss the appropriate Hotelling rule for this economy. The reason for concentrating on this rule is that explicit analysis of the optimal solution will require detailed specifications of the functions in the model whereas the Hotelling rule merely relates the derivatives of these functions. The Hotelling rule for this economy differs from the usual one [see for example Ingham/Simmons] of equilibrium in asset markets. Decentralisation of the optimal plan requires firms in the economy to have access to a full set of future markets.