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Cover of: Natural Resource Extraction in a Federation
Jean-François Tremblay, Motohiro Sato, Robin Boadway

Natural Resource Extraction in a Federation

Section: Articles
Volume 74 (2018) / Issue 1, pp. 34-51 (18)
Published 05.07.2018
DOI 10.1628/001522118X15109346479939
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  • 10.1628/001522118X15109346479939
Summary
We analyze a natural resource extraction problem in a two-region economy with mobile labour. One region produces manufacturing goods while the other produces agriculture and extracts a non-renewable resource. Manufacturing production exhibits increasing returns-to-scale if the production level is sufficiently high. There are multiple long-run equilibrium labour allocations towards which the economy may converge. Under decentralized resource management, a tendency to over-extract the resource relative to the federal optimum makes convergence to a low-income equilibrium more likely. Optimal extraction from the federation's perspective satisfies a modified Hotelling's rule that takes into account the impact of resource extraction on manufacturing production.