Irreversibility and Restoration in Natural Resource Development
AbstractWe 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, we show that the degree of irreversibility becomes an endogenous choice, rather than an exogenously given economic constraint. The fixed cost of restoration has continuous impacts, over and above the widely recognized fixed effects, on the level of development and restoration (and the marginal q). Further, the value of the project may not necessarily be convex in the underlying random variable, and discounting may in fact encourage the pattern of developing now and restoring later.
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Bibliographic InfoPaper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 1641.
Date of creation: 01 Jul 1999
Date of revision:
Publication status: Published in Oxford Economic Papers, July 1999, vol. 51 no. 3, pp. 559-573
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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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Other versions of this item:
- Zhao, Jinhua & Zilberman, David, 1999. "Irreversibility and Restoration in Natural Resource Development," Oxford Economic Papers, Oxford University Press, vol. 51(3), pages 559-73, July.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Arrow, Kenneth J & Fisher, Anthony C, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 312-19, May.
- Toman, Michael & Kolstad, Charles, 2000.
"The Economics of Climate Policy,"
dp-00-40, Resources For the Future.
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