Exploration externalities and government subsidies: The return to government

• The economic return to government exploration incentives is positive.
• Government drilling subsidies act as a third party certification system.
• Both drilling subsidies and traditional geological survey information are effective.

Governments have, for a long time, invested in the direct provision of basic geological survey information to support exploration and mining activity. Recently, Australian governments have also started to provide direct drilling subsidies to exploration companies. Using data for Western Australia we investigate the return to government from the direct provision of geological survey information and the provision of drilling subsides. We find no evidence that drilling subsidies are less effective than traditional geological survey spending in generating a return to government. We suggest drilling subsidies are effective because there is a dishonesty externality in the market for exploration equity capital that gives rise to a market for lemons problem, and that government programs to award drilling subsidies to exploration companies work as a third party certification system that addresses this problem. We conclude by showing that, with real discount rates of 5%, 7%, and 9%, and a narrow definition of benefits, the expected benefit–cost ratios for State government support for exploration are 9.0, 6.7, and 5.2.