Opposing Irreversibilities and Tipping Point Uncertainty

Charles Sims and David Finnoff

Journal of the Association of Environmental and Resource Economists, 2016, vol. 3, issue 4, 985 - 1022

Abstract: Irreversible environmental damage can lead to a more "conservationist" policy than would otherwise be optimal while sunk costs create an economic irreversibility that leads to policies that are less "conservationist" than they otherwise would be. The economic irreversibility effect is often larger than the effect of irreversible damage. We revisit this result with multiple uncertainties and a tipping point that triggers irreversible damage. An optimal stopping model over dynamic environmental lotteries is developed to characterize the optimal timing and stringency of an environmental policy subject to two kinds of irreversibility (economic and an environmental tipping point), two tipping point mechanisms (critical damage thresholds and random events), and two kinds of uncertainty (uncertain system dynamics and uncertainty in when the tipping point will be crossed). Using a bioinvasion example, results illustrate how differing definitions of precaution and beliefs about the degree of irreversibility may help explain persistent debates in environmental policy.

Date: 2016
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