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Attitudes towards risk and the optimal exploitation of an exhaustible resource

Lewis, Tracy R. (1977) Attitudes towards risk and the optimal exploitation of an exhaustible resource. Journal of Environmental Economics and Management, 4 (2). pp. 111-119. ISSN 0095-0696.

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The exploitation of a nonrenewable 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. Rish-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.

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Additional Information:© 1977 Published by Elsevier Inc. Received April 19, 1976; revised November 1, 1976. The author wishes to thank R. Forsythe and R. Schmalensee for helpful comments on an earlier draft. Financial assistance from ERDA and the Environmental Quality Laboratory at The California Institute of Technology is gratefully acknowledged. Formerly SSWP 103.
Group:Environmental Quality Laboratory
Funding AgencyGrant Number
Energy Research and Development Administration (ERDA)UNSPECIFIED
Environmental Quality LaboratoryUNSPECIFIED
Issue or Number:2
Record Number:CaltechAUTHORS:20171127-161807534
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:83476
Deposited By: Jacquelyn Bussone
Deposited On:28 Nov 2017 18:07
Last Modified:03 Oct 2019 19:06

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