IRREVERSIBILITY AND THE OPTIMAL USE OF NATURAL ENVIRONMENTS
Previously we have suggested that some of the distinctive and challenging problems for valuation and allocation of the resources of natural environments are dynamic. Clearly, if decisions with respect to the use of these resources are impossible to reverse in a way that ordinary economic decisions are not, effects over long periods of time must be considered. This in turn raises the question of discounting, or more generally, of the efficiency and equity of resource use in the very long run. Moreover, where information about the costs and gains of alternative uses is particularly poor, due to the long period to which it must apply and the nonmarket character of some of the uses, decisions should take account of this uncertainty. For example, what is the appropriate social attitude toward the risk associated with the (irreversible) conversion of a natural environment to developmental purposes? What are the implications for option value?
In this and the following chapter we address these issues primarily from a theoretical point of view. We begin with a discussion of irreversibility in economic processes, with particular reference to the conversion of natural environments. The remainder of the chapter is devoted to a model of irreversible investment in a resource development project in a natural environment. The model assumes a planning authority whose objective is to maximize the present value of net social returns from use of the environment, taking account of the opportunity returns forgone. That is, it is explicitly concerned with the sacrifice in value derived from the amenity resources of the environment that accompanies the project.
As noted in chapter 2, it is not claimed that a social choice concerning the desirability of a project should be made solely on the basis of aggregate benefit, even net of environmental costs, i.e., on the basis of Kaldor-Hicks efficiency. We do feel that information about these magnitudes is relevant to a public decision. (Recall the even stronger statement by the Public Land Law Review Commission that maximization of net social benefits is