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Irreversibility and Restoration in Natural Resource Development

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  • Zhao, Jinhua
  • Zilberman, David

Abstract

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.

Suggested Citation

  • Zhao, Jinhua & Zilberman, David, 1999. "Irreversibility and Restoration in Natural Resource Development," Staff General Research Papers Archive 1641, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:1641
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    File URL: http://www2.econ.iastate.edu/papers/NDN0002.pdf
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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," The Quarterly Journal of Economics, Oxford University Press, vol. 88(2), pages 312-319.
    2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
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    Cited by:

    1. 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.
    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.

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