Social Optimality with Resource Depletion: An Investment Project Valuation Model

Abstract

The core objective of this research is to arrive at the optimal social extraction path on an investment project level reaching dynamic social optimality with resource depletion, in contrast to the traditional benefit-cost criterion of project feasibility. The focal argument is that marginal social benefits, at equilibrium, must strictly exceed marginal social cost, at equilibrium, in order to correct for historical failures and expected cumulative environmental disturbances away from the optimum social extraction path. A dynamic optimization model is proposed based on maximizing the generation of social capital for a given transversal-free project cycle whereby social surplus includes environmental factors related to resource depletion and environmental sustainability. This is based on upper-bound and lower-bound system failure of environmental sustainability constraints, in addition to private financial payoffs from a given supply of capital. The main assumption is that social surplus can be formulated as an aggregate likelihood function for private financial returns augmented to produce additivelyseparable social utility levels pertaining to the micro-sustainability of physical capital resources at an investment project level. An upper sustainability constraint on resource depletion ensures lack of resource over-depletion beyond the socially efficient rate, and a lower sustainability constraint ensures availability of critically needed input resources for an efficient production level. Both constraints are treated in dynamic optimality with the objective of maximizing the social surplus from an investment project. Atl Econ J (2010) 38:371–373 DOI 10.1007/s11293-010-9227-1