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Taking One for the Team: Is Collective Action More Responsive to Ecological Change?

Charles Sims (), David Finnoff and Jason Shogren ()

Environmental & Resource Economics, 2018, vol. 70, issue 3, 589-615

Abstract: Abstract Debate persists around the timing of risk reduction strategies for large-scale ecological change for three reasons: risks are difficult to predict, they involve irreversibilities, and they impact multiple jurisdictions. The combination of these three factors creates a general class of filterable spatial-dynamic externalities (FSDE) in which one person’s risk reduction investments reduce or filter undesirable events experienced by others and underestimates the option value placed on being able to respond to new information about the consequences of ecological change. By focusing on the optimal intervention decision, we illustrate how and when the opposing forces created by an FSDE will lead to a divergence in private and collective risk reduction strategies. We use bioinvasions as our motivating example. The bioinvasion first hits one jurisdiction, and that jurisdiction’s risk reduction investment reduces the risk faced by all other jurisdiction. We find that efforts to internalize the full benefits of risk reduction investments may have unintended consequences on the responsiveness of environmental policy. There is a social welfare gain from asking the first jurisdiction to delay a risk reduction investment to internalize the option values of all at-risk jurisdictions.

Keywords: Filterable externality; Uncertainty; Irreversibility; Real options; Precautionary principle (search for similar items in EconPapers)
JEL-codes: D81 D83 D62 Q54 (search for similar items in EconPapers)
Date: 2018
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