Applied and Computational Mathematics Seminar
Friday, February 23, 2018 - 1:55pm
1 hour (actually 50 minutes)
We use a stochastic dynamic programming approach to address the following question: Can a homogenous resource extraction model (one without extraction costs, without new discoveries, and without technical progress) generate non-increasing resource prices? The traditional answer to that question contends that prices should exhibit an increasing trend as the exhaustible resource is being depleted over time (The Hotelling rule). In contrast, we will show that injecting concerns for temporal resolution of uncertainty in a resource extraction problem can generate a non-increasing trend in the resource price. Indeed, the expected rate of change of the price can become negative if the premium for temporal resolution of uncertainty is negative and outweighs both the positive discount rate and the short-run risk premium. Numerical examples are provided for illustration.