CHAPTER 16:

Capital, Land, and Natural Resources

SUMMARY
 CHAPTER 16: CAPITAL, LAND, AND
NATURAL RESOURCES
Capital
• Because capital goods are durable, it is necessary to distinguish
between the stock of capital goods and the flow of services provided
by them, and thus between their purchase price and their rental price.
The linkage between them relies on the ability to assign a present
value to future returns. The present value of a future payment will be
lower when the payment is more distant and the interest rate is higher.
• The rental price of capital in each period equals its marginal revenue
product in that period. It is the amount that is paid to obtain the flow of
services that a capital good provides for a given period. The purchase
price is the amount that is paid to acquire ownership of the capital, and
in equilibrium it is equal to the present value of the future net income
stream generated by the capital. This is the present value of capital’s
future stream of marginal revenue products.
 CHAPTER 16: CAPITAL, LAND, AND
NATURAL RESOURCES
• An individual firm will invest in capital goods as long as the present
value of the stream of future net incomes that are provided by another
unit of capital exceeds its purchase price. For a single firm and for the
economy as a whole, the size of the total capital stock demanded
varies negatively with the rate of interest.
Non-Renewable Resources
• The socially optimal rate of exploitation for a completely non-
renewable resource occurs when its price rises at a rate that is equal
to the rate of interest. This is also the rate that will be established by a
profit-maximising, competitive industry.
• Resources for which the demand is highly elastic will have a high rate
of exploitation in the near future and a fairly rapid fall-off over time.
Resources for which the demand is highly inelastic will have a lower
rate of exploitation in the near future and a smaller fall-over time.
 CHAPTER 16: CAPITAL, LAND, AND
NATURAL RESOURCES

• Rising prices act as a conservation device by rationing the

consumption over time according to people’s preferences. As prices
rise, conservation, discovery of new sources of supply, and
innovation to reduce demand are all encouraged.
• The price system can fail to produce optimal results if [a] people lack
the necessary knowledge, [b] property rights are inadequate to
protect supplies left for future use by their owners, or [c] the social
rate of discount differs significantly from the market rate.
• Controlling the price of a non-renewable resource at a constant level
speeds up the rate of exploitation and removes the price incentives to
react to the growing scarcity.