Nonrenewable Resource Prices and Consumption When Resources Are Essential and Costly

This paper analyzes competitive nonrenewable resource use when the resource is both essential to final goods production and costly to produce. When the resource stock is also essential to resource production, a limiting steady state is approached with the share of labor used in resource production falling toward zero and the share of remaining reserves consumed rising to a positive constant. Ricardian differences in the resource stock are shown to be neither necessary nor sufficient to generate falling resource prices. Instead, resource prices fall only when there is an equilibrium R&D bias toward the resource-producing sector. Per capita resource consumption falls only when resource prices grow faster than GDP, which happens only when reserves are low.