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A Portfolio-Balancing Approach to Natural Capital and Liabilities: Managing Livestock and Wildlife Diseases with Cross-Species Transmission

Richard D. Horan (), Eli P. Fenichel (), David Finnoff and Carson Reeling
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Richard D. Horan: Michigan State University
Eli P. Fenichel: Yale University

Environmental & Resource Economics, 2018, vol. 70, issue 3, 673-689

Abstract: Abstract Researchers often refer to stocks of desirable natural resources as natural capital and stocks of undesirable species as natural liabilities. The logical extension is that when these natural resources interact, then the ecosystem is a collection or portfolio of natural capital and liabilities. However, natural capital and liabilities held in an ecosystem portfolio are more complex to manage than financial asset portfolios. The key problem in a financial asset portfolio is adjusting the rates of return on assets for risk and correlation of risk. In contrast, the returns on natural assets and liabilities require many other adjustments arising from stock-related returns and depreciation that endogenously depend on both stocks and controls, including interactions among these variables. This means ecosystem portfolio analysis extends beyond the consideration of uncertainty and involves understanding complex economic–ecological tradeoffs, even in a deterministic setting. We use capital theory in the context of a deterministic bioeconomic model of valuable wildlife, livestock, and a pathogen that can be passed between them to develop a portfolio balancing approach to understanding the tradeoffs associated with ecosystem management. This specific ecosystem is highly relevant to conservation, health, and livestock agriculture. Within the context of this example, we also explore issues of mitigation and adaptation to disease risks, and the management implications of cross-species transmission. A final contribution is to examine how exports and infection risks influence the ecological thresholds that epidemiologists often focus on to guide disease management.

Keywords: Natural capital; Portfolio; Economic-epidemiology; Ecosystem services (search for similar items in EconPapers)
JEL-codes: Q2 Q57 (search for similar items in EconPapers)
Date: 2018
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