The Optimal Management of a Natural Resource with Switching Dynamics

Michele Baggio ()
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Michele Baggio: Chair of Environmental Policy and Economics, Institute for Environmental Decisions, ETH Zurich

No 12-19, IED Working paper from IED Institute for Environmental Decisions, ETH Zurich

Abstract: This paper analyzes the optimal management of a natural resource that can shift between different dynamics at random times. Using a classical linear control model I investigate how the switching behavior influences the optimal extraction of the resource. I use exogenous sea-surface temperature anomalies to study how future climate change affects the optimal management of the resource. The model is applied to the Peruvian anchoveta fishery, which has shown evidence of structural differences in the biological relationship over time. Results indicate that a management policy that adapts to a changing dynamic leads to mean biomass and resource rents that are 2 and 2.5 times higher than a non-adaptive policy. This analysis provides a framework that can be used to quantitatively address the effects of adaptation in the context of a natural resource. Specifically, it gives important indications for the management of a natural resource with alternating dynamics, which can be used to design policies that adapt to the variability of the physical environment.

Keywords: Bioeconomic modeling; Climate change; Peruvian anchoveta; Real option; Regime switching (search for similar items in EconPapers)
JEL-codes: C61 Q22 Q54 Q57 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2012-11
New Economics Papers: this item is included in nep-agr, nep-env and nep-res
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