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Irreversibility and Restoration in Natural Resource Development

  • Zhao, Jinhua
  • Zilberman, David

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.

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Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 51 (1999)
Issue (Month): 3 (July)
Pages: 559-73

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Handle: RePEc:oup:oxecpp:v:51:y:1999:i:3:p:559-73
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  1. 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.
  2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474, April.
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