Abstract
Exploration provides information that can change expectations on geologically similar but unexplored prospects. This is an external effect if the exploring firm does not own the property affected by the information. This external effect has been used to motivate changes in Federal regulations for energy exploration. A Bayesian decision framework is developed and applied to a Federal offshore leasing region to quantify this external effect. In a study area exceeding 20,000 square miles off the South Eastern U. S. coast, the optimal private exploration sequence exceeds the uncompensated externality sequence by two prospects. After further adjusting for transfer payments, the social optimum requires the exploration of two additional prospects. Failure to conduct the privately optimum sequence leads to an expected loss of $51.85 million, about seven percent of the total value of the area.
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