Attitudes towards risk and the optimal exploitation of an exhaustible resource
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.
© 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.