Irreversibility and restoration in natural resource development

We extend Real Option Theory to evaluate natural resource development proje cts that may bring negative net benefits and require costly restoration. Ba sed on a new concept, irreversibility cost, we show that the degree of irre versibility becomes an endogenous choice, rather than an exogenously given economic constraint, Fixed costs of restoration have continuous impacts, ov er and above the widely recognized fixed effects, on development and restor ation levels (and the marginal q). The project's value may not necessarily be convex in the underlying random variable, and discounting may in fact en courage the pattern of developing now and restoring later.