Natural vs. financial insurance in the management of public-good ecosystems

Martin Quaas and Stefan Baumgärtner

No 34, Working Paper Series in Economics from University of Lüneburg, Institute of Economics

Abstract: In the face of uncertainty, ecosystems can provide natural insurance to risk averse users of ecosystem services. We employ a conceptual ecological-economic model to analyze the allocation of (endogenous) risk and ecosystem quality by risk averse ecosystem managers who have access to financial insurances, and study the implications for individually and socially optimal ecosystem management, and policy design. We show that while an improved access to financial insurance leads to lower ecosystem quality, the effect on the free-rider problem and on welfare is determined by ecosystem properties. We derive conditions on ecosystem functioning under which, if financial insurance becomes more accessible, (i) the extent of optimal regulation increases or decreases; and (ii) welfare, in the absence of environmental regulation, increases or decreases.

Keywords: ecosystem quality; ecosystem services; ecosystem management; endogenous environmental risk; insurance; risk-aversion; uncertainty (search for similar items in EconPapers)
Pages: 29 pages
Date: 2006-10-26
New Economics Papers: this item is included in nep-env, nep-ias and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Journal Article: Natural vs. financial insurance in the management of public-good ecosystems (2008)
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