Irreversibility and Restoration in Natural Resource Development
We 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.
|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|
|Contact details of provider:|| 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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- Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474, 06-2016.
- Kenneth J. Arrow & Anthony C. Fisher, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, Oxford University Press, vol. 88(2), pages 312-319.
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