Capacity choice and the theory of the mine

When extraction from mineral deposits is constrained by fixed capacity, an r-per-cent rule holds. This deposit-specific rule, however, is "more partial'' than Hotelling's rule in that it is followed by price takers and does not require price to adjust to produce equilibrium. To obtain the resource rent to which the rule applies, the shadow value of capacity must be subtracted from the usual net price, i.e., price less short-run marginal cost. But the shadow value of capacity cannot be calculated from common depreciation formulas; an alternative method of calculating the shadow values is derived. The shadow value of reserves may be increasing in the level of initial reserves. If there are increasing returns to installing capacity, the value of the resource is not equal to the discounted resource rent.