Abstract
The real price of base metals exhibits a decreasing trend over time. We model base metals prices as the equilibrium of aggregate supply and demand. This allows us to study the effect of determinants of base metals prices. The trend in the price of base metals depends on technological progress, resource scarcity, natural resource taxes, and the interest rate. Under certain parameter restrictions we can explain the decreasing trend in prices over time. This phenomenon is mostly explained by the substitution effect and technological progress. We derive policy implications related to natural resource taxation.
Highlights
Base metals are industrial non-ferrous metals: aluminum, copper, lead, nickel, tin, and zinc
By solving the Hotelling-style problem of the regulator we find that the trend in the supply of base metals depends on natural resource tax, interest rate, technology progress and degradation of ore in nature
There are several policy implications from Proposition 2: 1) If the natural resource tax τ is initially high, the rate of supply increase is low, causing the supply to be relatively low in the future; 2) High tax and a high discount rate imply a high supply of base metals; 3) The effect of the discount rate on the rate of supply change is ambiguous
Summary
Base metals are industrial non-ferrous metals: aluminum, copper, lead, nickel, tin, and zinc They are used for building homes, automobiles, plants, equipment, pipes, wires, and so on. For the supply side we consider the regulated industry with a Cobb-Douglas production function for base metals. Our paper fills the gap in this literature by offering a theoretical treatment of pricing which includes the production functions for metals, manufacturers, and the set of technological and policy-relevant parameters which affect the price trend. Ing the Cobb-Douglas production function, which combines the effect of technological progress with the notion of substitutability of inputs. This allows us to establish the possibility of a constant declining trend of prices
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