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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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    References listed on IDEAS

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    1. Fisher, Anthony C & Krutilla, John V & Cicchetti, Charles J, 1972. "The Economics of Environmental Preservation: A Theoretical and Empirical Analysis," American Economic Review, American Economic Association, vol. 62(4), pages 605-619, September.
    2. Kenneth J. Arrow & Anthony C. Fisher, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," Palgrave Macmillan Books, in: Chennat Gopalakrishnan (ed.), Classic Papers in Natural Resource Economics, chapter 4, pages 76-84, Palgrave Macmillan.
    3. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    4. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
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    1. David Zilberman & Leslie Lipper & Nancy McCarthy, 2009. "Putting Payments for Environmental Services in the Context of Economic Development," Natural Resource Management and Policy, in: Leslie Lipper & Takumi Sakuyama & Randy Stringer & David Zilberman (ed.), Payment for Environmental Services in Agricultural Landscapes, chapter 2, pages 9-33, Springer.
    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.
    4. 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.
    5. Wenyuan Hua & Zhihan Chen & Liangguo Luo, 2022. "The Effect of the Major-Grain-Producing-Areas Oriented Policy on Crop Production: Evidence from China," Land, MDPI, vol. 11(9), pages 1-28, August.

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