On option values in environmental and resource economics

Christian Traeger

Resource and Energy Economics, 2014, vol. 37, issue C, 242-252

Abstract: Global warming, alterations of ecosystems, and sunk investments all imply irreversible changes with uncertain future costs and benefits. The Arrow–Fisher–Hanemann–Henry quasi-option value and the Dixit–Pindyck option value both measure how irreversibility and uncertainty change the value of preserving an ecosystem or postponing an investment. This paper shows the precise relation between the two option values and explains that the quasi-option value captures the value of learning conditional on preservation, whereas the Dixit–Pindyck option value captures the net value of preservation under learning. We show how either of the two concepts alters the common net present value decision rule. We illustrate similarities, differences, and the decision rules in two instructive examples.

Keywords: Irreversibility; Option; Quasi-option value; Benefit cost analysis; Uncertainty (search for similar items in EconPapers)
JEL-codes: D81 Q51 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:resene:v:37:y:2014:i:c:p:242-252

DOI: 10.1016/j.reseneeco.2014.03.001

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