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Natural vs. financial insurance in the management of public-good ecosystems

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Author Info

  • Martin F. Quaas

    ()
    (Department of Ecological Modelling, UFZ-Centre for Environmental Research Leipzig-Halle)

  • Stefan Baumgärtner

    ()
    (Centre for Sustainability, University of Lüneburg)

Abstract

In the face of uncertainty, ecosystems can provide natural insurance to risk averse users of ecosystem services. We employ a conceptual ecological-economic model to analyze the allocation of (endogenous) risk and ecosystem quality by risk averse ecosystem managers who have access to financial insurances, and study the implications for individually and socially optimal ecosystem management, and policy design. We show that while an improved access to financial insurance leads to lower ecosystem quality, the effect on the free-rider problem and on welfare is determined by ecosystem properties. We derive conditions on ecosystem functioning under which, if financial insurance becomes more accessible, (i) the extent of optimal regulation increases or decreases; and (ii) welfare, in the absence of environmental regulation, increases or decreases.

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Bibliographic Info

Paper provided by University of Lüneburg, Institute of Economics in its series Working Paper Series in Economics with number 34.

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Length: 29 pages
Date of creation: 26 Oct 2006
Date of revision:
Handle: RePEc:lue:wpaper:34

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Web page: http://leuphana.de/institute/ivwl.html

Related research

Keywords: ecosystem quality; ecosystem services; ecosystem management; endogenous environmental risk; insurance; risk-aversion; uncertainty;

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References

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  1. Martin F. Quaas & Stefan Baumgärtner, 2006. "The Private and Public Insurance Value of Conservative Biodiversity Management," Working Paper Series in Economics 33, University of Lüneburg, Institute of Economics.
  2. Eppink, Florian V. & Withagen, Cees A., 2009. "Spatial patterns of biodiversity conservation in a multiregional general equilibrium model," Resource and Energy Economics, Elsevier, vol. 31(2), pages 75-88, May.
  3. Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-48, July-Aug..
  4. Skees, Jerry & Varangis, Panos & Larson, Donald & Siegel, Paul, 2002. "Can Financial Markets be Tapped to Help Poor People Cope with Weather Risks?," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  5. Mario Miranda & Dmitry V. Vedenov, 2001. "Innovations in Agricultural and Natural Disaster Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(3), pages 650-655.
  6. Rauscher, Michael & Barbier, Edward B., 2007. "Biodiversity and geography," Thuenen-Series of Applied Economic Theory 79, University of Rostock, Institute of Economics.
  7. Olivier Mahul, 2001. "Optimal Insurance Against Climatic Experience," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(3), pages 593-604.
  8. Sandler, Todd & Sternbenz, Frederic P., 1990. "Harvest uncertainty and the tragedy of the commons," Journal of Environmental Economics and Management, Elsevier, vol. 18(2), pages 155-167, March.
  9. Yann Bramoullé & Nicolas Treich, 2009. "Can Uncertainty Alleviate the Commons Problem?," Journal of the European Economic Association, MIT Press, vol. 7(5), pages 1042-1067, 09.
  10. Shogren, Jason F. & Crocker, Thomas D., 1999. "Risk and Its Consequences," Journal of Environmental Economics and Management, Elsevier, vol. 37(1), pages 44-51, January.
  11. JunJie Wu, 1999. "Crop Insurance, Acreage Decisions, and Nonpoint-Source Pollution," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(2), pages 305-320.
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Citations

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Cited by:
  1. Omer, Amani & Pascual, Unai & Russell, Noel, 2010. "A theoretical model of agrobiodiversity as a supporting service for sustainable agricultural intensification," Ecological Economics, Elsevier, vol. 69(10), pages 1926-1933, August.
  2. Stefan Baumgärtner & Martin F. Quaas, 2007. "Agro-biodiversity as natural insurance and the development of financial insurance markets," Working Paper Series in Economics 61, University of Lüneburg, Institute of Economics.
  3. Sébastien Foudi, 2012. "Exploitation of soil biota ecosystem services in agriculture: a bioeconomic approach," Working Papers 2012-02, BC3.
  4. Russell, Noel P. & Omer, Amani A. & Pascual, Unai, 2009. "Technology, preferences and the sustainable intensification of agricultural production," 2009 Conference, August 16-22, 2009, Beijing, China 51743, International Association of Agricultural Economists.
  5. Baumgärtner, Stefan & Becker, Christian & Frank, Karin & Müller, Birgit & Quaas, Martin, 2008. "Relating the philosophy and practice of ecological economics: The role of concepts, models, and case studies in inter- and transdisciplinary sustainability research," Ecological Economics, Elsevier, vol. 67(3), pages 384-393, October.
  6. Jean-Michel Salles, 2011. "Valuing biodiversity and ecosystem services: why linking economic values with Nature?," Working Papers 11-24, LAMETA, Universtiy of Montpellier, revised Dec 2011.
  7. Fischer, Beate & Klauer, Bernd & Schiller, Johannes, 2013. "Prospects for sustainable land-use policy in Germany: Experimenting with a sustainability heuristic," Ecological Economics, Elsevier, vol. 95(C), pages 213-220.
  8. Stefan Baumgärtner & Sebastian Strunz, 2009. "The economic insurance value of ecosystem resilience," Working Paper Series in Economics 132, University of Lüneburg, Institute of Economics.
  9. Stefan Baumgärtner & Martin F. Quaas, 2010. "Managing increasing environmental risks through agrobiodiversity and agrienvironmental policies," Agricultural Economics, International Association of Agricultural Economists, vol. 41(5), pages 483-496, 09.
  10. Quaas, Martin F. & Baumgartner, Stefan & Becker, Christian & Frank, Karin & Muller, Birgit, 2007. "Uncertainty and sustainability in the management of rangelands," Ecological Economics, Elsevier, vol. 62(2), pages 251-266, April.
  11. Müller, Birgit & Quaas, Martin F. & Frank, Karin & Baumgärtner, Stefan, 2011. "Pitfalls and potential of institutional change: Rain-index insurance and the sustainability of rangeland management," Ecological Economics, Elsevier, vol. 70(11), pages 2137-2144, September.
  12. Roland Olbrich & Martin F. Quaas & Stefan Baumgaertner, 2012. "Characterizing commercial cattle farms in Namibia: risk, management and sustainability," Working Paper Series in Economics 248, University of Lüneburg, Institute of Economics.

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