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Natural Resource Extraction in a Federation

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  • Robin Boadway
  • Motohiro Sato
  • Jean-François Tremblay

Abstract

We analyze a natural resource extraction problem in a two-region economy with mobile labour. One region produces manufacturing goods while the other produces agriculture and extracts a non-renewable resource. Manufacturing production exhibits increasing returns-to-scale if the production level is sufficiently high. There are multiple long-run equilibrium labour allocations towards which the economy may converge. Under decentralized resource management, a tendency to over-extract the resource relative to the federal optimum makes convergence to a low-income equilibrium more likely. Optimal extraction from the federation's perspective satisfies a modified Hotelling's rule that takes into account the impact of resource extraction on manufacturing production.

Suggested Citation

  • Robin Boadway & Motohiro Sato & Jean-François Tremblay, 2018. "Natural Resource Extraction in a Federation," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 74(1), pages 34-51, March.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201803)74:1_34:nreiaf_2.0.tx_2-e
    DOI: 10.1628/001522118X15109346479939
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    1. Baldwin, Richard E. & Krugman, Paul, 2004. "Agglomeration, integration and tax harmonisation," European Economic Review, Elsevier, vol. 48(1), pages 1-23, February.
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    More about this item

    Keywords

    natural resource extraction; decentralization; inter-regional mobility;
    All these keywords.

    JEL classification:

    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)

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