Irreversibility and Restoration in Natural Resource Development

Jinhua Zhao and David Zilberman

Staff General Research Papers Archive from Iowa State University, Department of Economics

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.

Date: 1999-07-01
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Citations: View citations in EconPapers (6)

Published in Oxford Economic Papers, July 1999, vol. 51 no. 3, pp. 559-573

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Journal Article: Irreversibility and Restoration in Natural Resource Development (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:1641

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