The discount rate and resource extraction: A simulation approach

Abstract

The relationship between the discount rate and the rate of resource extraction is central to the economics of depletion. Neher and Farzin have shown this relationship to be of ambiguous sign for capital intensive minerals because a higher discount rate, while lowering the value of the resource stock and thus encouraging extraction, also increases the capital cost of that extraction. This paper employs a simulation analysis to assess the relative importance of these anticonservation and disinvestment effects for the important copper and bituminous coal industries. At the actual estimated discount rates for these minerals we find that the two effects approximately balance, leaving extraction approximately neutral with respect to the rate of discount. This in turn negates the common presumption of underconservation by mineral firms with discount rates exceeding the social rate of discount.