Determining Shadow Price of a Nonrenewable Resource in a Small Open Economy

Abstract

In the literature of welfare, wealth, and comprehensive accounting, it has been shown that comprehensive wealth can indicate social welfare improvement (e.g. Dasgupta 2009). In the present paper, I apply the theory to a nonrenewable resource in a small open economy. I find that comprehensive wealth can be associated with the value of current resource stock evaluated at current market unit resource rents, which can be divided into two parts: shadow price of the resource and shadow price of extraction technology at current time. In addition, I show that the shadow price of the resource is the present value unit resource rents when the resource is exhausted in the user cost method. This differs from the one derived by (Hamilton and Ruta 2009). Moreover, the change in comprehensive wealth can indicate social welfare improvement only if the market unit resource rents do not change dramatically or the resource is almost exhausted. Otherwise, it may provide misleading information for social welfare improvement even thought they move in the same direction. In the special case of the small open economy discussed here, total wealth of the resource is a plausible measure of social welfare since it coincides exactly with the social welfare.