Energy and physical capital: a case of non-classical dynamics

Date
2019
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Source Title
Environmental and Resource Economics
Print ISSN
0924-6460
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Publisher
Springer
Volume
72
Issue
4
Pages
1003 - 1022
Language
English
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Abstract

We study the importance of considering different energy requirements for physical capital and final good production in an overlapping generations (OLG) resource economy. In contrast to the standard OLG framework, but consistently with the empirical evidence, we assume that the accumulation of physical capital requires more energy than the production of consumption goods. Focusing on exhaustible energy resources, we find that OLG equilibria can exhibit “non-classical dynamics”: the economy generates complex dynamics where, differing from the response predicted by the standard approach, resource prices may not increase monotonically. This result illustrates that the technological assumptions behind the energy inputs should be taken with caution, in particular on dynamic analyses involving exhaustible energy resources.

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