Question

At the efficient level of consumption, the marginal user cost of consuming a non- renewable resource is zero if:

a. There is no discounting.

b. The discount rate declines over time (hyperbolic discounting).

c. There is an infinite discount rate (i.e. we don’t care about the future).

d. Both a and b are correct.

Answer 1

Part C There is an infinite discount rate (i.e. we don’t care about the future).

Since marginal cost of consuming a non-renewable means the additional cost of consuming a non-renewable resource. Since this is 0, it means there is no cost associated with more consumption which will lead to an unlimited use of the resource.

As we know that non-renewables are limited in nature, so such unlimited consumption will lead to a depletion of the resource. This is a condition arising from infinite discount rate. Therefore, the depletion would mean we do not care about the future.

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