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Irreversibility and Restoration in Natural Resource Development

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  • Zhao, Jinhua
  • Zilberman, David

Abstract

The authors extend real option theory to evaluate natural resource development projects that may bring negative net benefits and require costly restoration. Based on a new concept, irreversibility cost, they show that the degree of irreversibility becomes an endogenous choice, rather than an exogenously given economic constraint. Fixed costs of restoration have continuous impacts, over and above the widely recognized fixed effects, on development and restoration levels (and the marginal q). The project's value may not necessarily be convex in the underlying random variable and discounting may, in fact, encourage the pattern of developing now and restoring later. Copyright 1999 by Royal Economic Society.

Suggested Citation

  • Zhao, Jinhua & Zilberman, David, 1999. "Irreversibility and Restoration in Natural Resource Development," Oxford Economic Papers, Oxford University Press, vol. 51(3), pages 559-573, July.
    • Handle: RePEc:oup:oxecpp:v:51:y:1999:i:3:p:559-73
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    References listed on IDEAS

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    1. Kenneth J. Arrow & Anthony C. Fisher, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," Palgrave Macmillan Books, in: Chennat Gopalakrishnan (ed.), Classic Papers in Natural Resource Economics, chapter 4, pages 76-84, Palgrave Macmillan.
    2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    3. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    4. Fisher, Anthony C & Krutilla, John V & Cicchetti, Charles J, 1972. "The Economics of Environmental Preservation: A Theoretical and Empirical Analysis," American Economic Review, American Economic Association, vol. 62(4), pages 605-619, September.
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    Cited by:

    1. David Zilberman & Leslie Lipper & Nancy McCarthy, 2009. "Putting Payments for Environmental Services in the Context of Economic Development," Natural Resource Management and Policy, in: Leslie Lipper & Takumi Sakuyama & Randy Stringer & David Zilberman (ed.), Payment for Environmental Services in Agricultural Landscapes, chapter 2, pages 9-33, Springer.
    2. Kolstad, Charles D. & Toman, Michael, 2005. "The Economics of Climate Policy," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 3, chapter 30, pages 1561-1618, Elsevier.
    3. Hernandez, R.R. & Easter, S.B. & Murphy-Mariscal, M.L. & Maestre, F.T. & Tavassoli, M. & Allen, E.B. & Barrows, C.W. & Belnap, J. & Ochoa-Hueso, R. & Ravi, S. & Allen, M.F., 2014. "Environmental impacts of utility-scale solar energy," Renewable and Sustainable Energy Reviews, Elsevier, vol. 29(C), pages 766-779.
    4. Xie, Yang & Zilberman, David, 2014. "The Economics of Water Project Capacities and Conservation Technologies," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 169820, Agricultural and Applied Economics Association.
    5. Wenyuan Hua & Zhihan Chen & Liangguo Luo, 2022. "The Effect of the Major-Grain-Producing-Areas Oriented Policy on Crop Production: Evidence from China," Land, MDPI, vol. 11(9), pages 1-28, August.

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