A General Equilibrium Model of Environmental Option Values

Iain Fraser and Katsuyuki Shibayama

Studies in Economics from School of Economics, University of Kent

Abstract: In this paper we consider the option value of the environment employing a general equilibrium growth model with a stochastic technology. In our model, as in existing studies, because of irreversibility, the environment has significant real option value. However, unlike the existing literature in which the uncertainty of the value of the environment is given exogenously, the value of the environment is endogenously determined. In our model, the elasticity of substitution eta between the environment and consumption plays a crucial role. We show that the option value, and hence, the optimal decision are both affected by eta not only quantitatively but also qualitatively.

Keywords: real option values; environment; general equilibrium; elasticity of substitution (search for similar items in EconPapers)
JEL-codes: G13 Q31 (search for similar items in EconPapers)
Date: 2011-04
New Economics Papers: this item is included in nep-cfn, nep-dge and nep-env
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