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time_value_hotelling_rule

time_value_hotelling_rule - ECO330T Environmental Resources...

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ECO330T: Environmental Resources and Economic Growth University of Texas at Austin, Fall 2008 Marble The Hotelling rule for the price of a non-renewable resource & the “time value” of money The Hotelling pricing rule says the owner/producer/seller of a non-renewable resource should bring the resource to market when the current price, P t , is greater than the price he expects in the future, P e t+1 . On the other hand, if the current price is less than the expected future price, he should wait to produce and sell at the higher price. But it is difficult to directly compare amounts of money at two different times, since you have to take into account the effects of the interest rate on money over time. For instance, a current amount of money P t will become a different amount of money at time t + 1 if it is invested at the prevailing interest rate: Namely, it will appreciate by the interest rate to become (1 + i)* P t .
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