How well are resource prices likely to serve as indicators of natural resource scarcity?

Abstract

It is generally believed that when a resource becomes increasingly scarce, a shadow is automatically cast in the form of a higher market price. The higher price induces substitution towards more abundant resources and the development of resource-saving technological progress. A growing number of ecological economists argue that, while resource prices adequately reflect the relative scarcity of various resource types, they are unable to reflect the absolute scarcity of either a particular resource type or the entire stock of all resources. They therefore believe resource prices cannot be used as a basis for determining the sustainable rate of resource use. In support of this emerging ecological economic position, a resource depletion model is employed under specific conditions to show that, for some considerable period of time, the price of a resource can fall even as the stock of the resource declines. Furthermore, the extent of the fall is greater if both a higher discount rate is applied and the marginal cost of resource extraction is assumed to be a function of past resource prices – a reasonable assumption given that the resource extraction process requires the use of previously extracted resources.