The role of spatial scale in the timing of uncertain environmental policy
AbstractThe spatial scale of an environmental problem is dictated by boundaries. Physical boundaries limit the extent of impacts while the scale of decision making creates perceived boundaries beyond which impacts are ignored by decision makers. While it is well understood that uncertainty and irreversibility will alter policy decisions aimed at alleviating environmental impacts, the effect of spatial scales, both physical and perceived, is less understood. When spatial scale is included in a real options model of environmental policy adoption results indicate that the importance and influence of spatial considerations depends on the level of uncertainty, stringency of the proposed policy and flexibility of the policy decision. Recognizing spatial scale may force policy adoption to take place within a window of current damage. When spatial scale is small or uncertainty high, this window for policy adoption can close precluding policy adoption entirely. This undermines well-known results demonstrating that changes in uncertainty will only alter the timing of policy adoption. In other instances, the policy adoption window remains open but the option value increases faster than the benefits of the policy creating a scenario where it is always preferable to delay. Here the inclusion of an option value can prevent adoption of policies that would be adopted according to traditional cost-benefit analysis. In general policy decisions will be most affected by spatial considerations when the spatial scale is small, damage is spreading fast, and the uncertainty in damage spread is high.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 36 (2012)
Issue (Month): 3 ()
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Web page: http://www.elsevier.com/locate/jedc
Reflecting barrier; Brownian motion; Irreversibility; Real options; Spatial boundary;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
- Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
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