Nonrenewable resources, endogenous reserves and environmental policy

This study develops a model for nonrenewable resource exploration and extraction containing all the relevant stages of operation from exploration to site reclamation, and uses the model for two purposes: to analyze the optimal exploration, development, and extraction decisions of a mining firm, and to design optimal environmental and biodiversity policies. The main novelty is the endogenization of reserves through the discovery process. The private solution is characterized, including conditions under which exploration and mine development are not performed. Then, the planner’s problem is analysed and compared with the private solution, and the optimal policy is derived. It is shown among other things that the discoveries must be richer in the social optimum than in the private optimum for it to be optimal to build a mine. In addition, corrective taxes have an informational advantage compared to the much used standards in that the regulator need not be informed of the reserve level.