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The Optimal Management of a Natural Resource with Switching Dynamics

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Abstract

This paper analyzes the optimal management of a natural resource that can shift between different dynamics at random times. Using a classical linear control model I investigate how the switching behavior influences the optimal extraction of the resource. I use exogenous sea-surface temperature anomalies to study how future climate change affects the optimal management of the resource. The model is applied to the Peruvian anchoveta fishery, which has shown evidence of structural differences in the biological relationship over time. Results indicate that a management policy that adapts to a changing dynamic leads to mean biomass and resource rents that are 2 and 2.5 times higher than a non-adaptive policy. This analysis provides a framework that can be used to quantitatively address the effects of adaptation in the context of a natural resource. Specifically, it gives important indications for the management of a natural resource with alternating dynamics, which can be used to design policies that adapt to the variability of the physical environment.

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File URL: http://www.ied.ethz.ch/pub/pdf/IED_WP19_Baggio.pdf
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Bibliographic Info

Paper provided by IED Institute for Environmental Decisions, ETH Zurich in its series IED Working paper with number 12-19.

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Length: 33 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:ied:wpsied:12-19

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Related research

Keywords: Bioeconomic modeling; Climate change; Peruvian anchoveta; Real option; Regime switching;

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  14. Julia Blasch & Renate Schubert & Birgit Soete, 2010. "Grün aus der Krise – Was können «grüne» Konjunkturpakete leisten?," IED Working paper 10-10, IED Institute for Environmental Decisions, ETH Zurich.
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  16. Zemel, Amos, 2012. "Precaution under mixed uncertainty: Implications for environmental management," Resource and Energy Economics, Elsevier, vol. 34(2), pages 188-197.
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