Irreversibility and restoration in natural resource development

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, Fixed costs of restoration have continuous impacts, over and above the widely recognized fixed effects, on development and restoration levels (and the marginal q). The project's value may not necessarily be convex in the underlying random variable, and discounting may in fact encourage the pattern of developing now and restoring later.