Uncertain Environmental Costs and the Optimum Rate of Oil Recovery

The socially optimal rate of oil recovery from a known reservoir is analyzed when environmental costs are uncertain and planners are either risk neutral or risk averse. It is shown that the rate of oil recovery has the same characteristics whether environmental costs are certain or uncertain. In either case, the rate of oil recovery falls monotonically to zero over the time horizon. However, the plannerʹs attitude toward risk is an important consideration. Risk averse planners, as a rule, begin oil recovery at a higher rate, reduce the rate of recovery more rapidly, and complete the oil recovery in a shorter time than risk neutral planners.