Is energy cost an accurate indicator of natural resource quality?

The use of energy cost as an indicator of natural resource quality is exami ned. Energy cost is the direct and indirect energy used to produce a unit o f a resource commodity. Different approaches to the role of energy in the e conomy are discussed and it is demonstrated theoretically that energy cost can give false indications of changes in resource quality. This is because energy cost is only an accurate indicator of resource quality if either ene rgy is the single primary factor of production and the economy can be repre sented by an input-output model, or if there is substitutability between th e factors of production, then marginal products must be proportional to the factors' embodied energy. These conditions are tested empirically using da ta from the US agricultural sector. The results show that there is substitu tability and marginal products are not proportional to embodied energy. How ever, the strong neoclassical assumption of price-taking profit-maximizatio n can be rejected at a 5% level of significance, though not at the 3.5% lev el. The generality of the empirical results may be restricted due to data l imitations but the theoretical framework can be applied to other data sets, other resources, and even other indicators. (C) 1999 Elsevier Science B.V. All rights reserved.