Price as a measure of scarcity

• The central result in Exhaustible Resource Economics is that one should extract the coal, oil, or copper so that Hotelling rent rises at the rate of interest. This generally translates into the price of coal, oil, or copper rising over time. Extraction and use sales slow down over time. Price rises.

• The common property problem would interfere with this price signalling process. The price would be lower than it should be.

• In the presence of monopoly or oligopoly, we might observe a high price for exhaustible resources without their being as much exhaustion as we might think.

• In 1980, two scholars made a bet involving scarcity and prices. One was Paul Ehrlich, author of The Population Bomb (1968) and a believer that environmental collapse was imminent. The other was Julian Simon, author of The Ultimate Resource (1981), a believer that human ingenuity will solve all problems.

The Wager

• Simon challenged Ehrlich to choose any non-government controlled raw materials and bet money on whether they would become more or less expensive. Ehrlich chose five metals - copper, chrome, nickel, tin, and tungsten – and the men calculated the amount of each material that was worth $200. They made a deal – if, after ten years, the metal was worth more than $200 (after adjusting for inflation), Simon would pay Ehrlich the difference. If the metal became less valuable, Ehrlich would pay Simon the difference.

• Between 1980-1990, world population rose by more than 800 million people. The price of each metal had fallen. Ehrlich paid $576.07, showing that the value of the metals had fallen almost in half.

• Ehrlich proposed a second bet. This time he wanted to wager that in 2004 compared to 1994 there would be less agricultural soil per person, less rice and wheat grown per person, lower sperm cell counts in human males, fewer plant and animal species in existence, a greater gap between the richest and poorest people, etc.

• Ehrlich wanted to bet on the amount of wheat grown rather than on the price of wheat. Simon declined the bet, saying it measured changes to human welfare only indirectly.

Non-oil Commodity Prices, 1900-1999, World Bank (2000)

• 1977-1979 price levels = 100

The following charts are from Occasional Paper # 60 (April 2007) of the European Central Bank, entitled: “Commodity Price Fluctuations, and their

Impact on Monetary and Fiscal Policies in Western and Central Africa”