Abstract
The study questions the fundamental assumption of the standard aggregate exploration-extraction model of nonrenewable resources that extraction costs and the level of reserves are inversely related. It also raises questions about the model's conclusions regarding exploration incentives and the valuation of reserves. An empirically tested disaggregate model is presented that suggests that exploration activity occurs from firms attempting to balance marginal extraction plus user costs at the intensive and extensive margins. Exploration is carried out until the marginal discovery cost of a deposit equals its present asset value and a U-shaped price path is indicated.
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