THE ECONOMICS OF EXPLORATION FOR EXTRACTIVE RESOURCE

Although the modern economic theory of exhaustible resources dates from Hotelling's 1931 paper 'The Economics of Exhaustible Resources', until recently little attention has been payed to the discovery of resource deposits. With renewed interest in resource questions in the last decade the problem of exploration and discovery has been addressed in two groups of papers, one dealing with the optimal rate of exploration and the other dealing with the effects of several externalities on the order in which different areas are explored. However, no attempt had been made to examine the two issues simultaneously.;The first three chapters of this paper survey the current state of the literature on exploration and develop a framework within which the simultaneous determination of the rate of exploration and the order of exploration can be examined. It is found that the same mechanism determines both the rate and order of exploration. In competitive equilibrium differential rents are assigned to plots of unexplored land with different prospects and exploration costs, and plots assigned higher rents are explored first. It is also found that the correct choice of these differential rents internalizes the externality created when information is public. This is because these rents include the expected value of information to be learned from previous exploration.;The final two chapters analyze the ways that allocation in resource markets is changed when information is not public, the ways in which information may be transmitted and some of the policy implications of the role of information in exploration and discovery. It is found that an equilibrium with private information is inefficient and differs from an equilibrium with public information in important ways but that no general statement can be made about whether exploitation will be faster with public or with private information. This is because there are many states that fall under the heading of private information, and the allocation of goods depends on the allocation of information.;The possibility of information being revealed by behavior is examined, and it is argued that the attainment of fully public information through this mechanism is unlikely. It is also argued that the special role of information and uncertainty in exploration raises doubts about the desirability ex ante efficiency as a welfare criterion.