A Test of the Theory of Exhaustible Resources

Abstract

An empirical test of the theory of exhaustible resources requires an estimate of the time path of the shadow price of the unextracted resource that generally is not observable because of the prevalence of vertical integration in natural resource industries. In this paper we use duality theory to derive an econometric model that provides a statistical test of the theory of exhaustible resources. A restricted cost function is used to obtain estimates of the shadow prices of unextracted resources. The procedure is illustrated with data for the Canadian metal mining industry. For this industry the empirical implications of the theory of exhaustible resources are strongly rejected.