Natural Resource Extraction with Reversible Stock Pollution

This paper concerns the stock pollution problem, such as the pollution of agricultural soil with heavy metals due to mining. Unlike the existing literature that examines the effects of natural pollution decay, this paper considers that the pollution stock is reversible only through capital investment. By examining the typical regulation that requires the mining firm to recover the disturbed land only after an operation shuts down, we find that the firm will wish to delay the reclamation because of the crucial role of the discounting given positive interest rates. In most cases delay is socially inefficient. A policy that requires the firm to pay ongoing pollution damage is optimal, provides the firm with incentives to control pollution, and can provide the firm with the incentive to immediately reclaim damaged land upon closure. In a society with expectations that mining pollution will be cleaned up when the mine shuts down, requiring the firm to pay ongoing damages provides incentive compatability.