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Attitudes Towards Risk and the Optimal Exploitation of an Exhaustible Resource

Lewis, Tracy R. (1976) Attitudes Towards Risk and the Optimal Exploitation of an Exhaustible Resource. Social Science Working Paper, 103. California Institute of Technology , Pasadena, CA. (Unpublished)

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The exploitation of a non-renewable natural resource, such as petroleum or mineral ores, is analyzed in a stochastic framework with price uncertainty. The market setting may be either monopolistic or competitive. We demonstrate that the rate of extraction varies directly with the resource owner's willingness to accept risk. Risk preferring owners use the resource more rapidly than risk neutral owners, who in turn deplete the resource more rapidly than risk averse owners. It is also seen that the usual practice of increasing the discount rate to account for risk induces a more rapid rate of resource use, when in fact a slower rate of depletion is desired.

Item Type:Report or Paper (Working Paper)
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Additional Information:Revised. The author wishes to thank Robert Forsythe and R. Schmalensee for helpful comments on an earlier draft. Published as Lewis, Tracy R. "Attitudes towards risk and the optimal exploitation of an exhaustible resource." Journal of Environmental Economics and Management 4.2 (1977): 111-119.
Group:Social Science Working Papers
Series Name:Social Science Working Paper
Issue or Number:103
Record Number:CaltechAUTHORS:20171030-140953189
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:82782
Deposited By: Jacquelyn Bussone
Deposited On:30 Oct 2017 21:28
Last Modified:03 Oct 2019 18:58

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