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The welfare gains from diversified environmental policies

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  • Blachly, Ben
  • Sims, Charles
  • Warziniack, Travis

Abstract

This paper provides a utility-theoretic framework for allocating a budget across multiple environmental projects with uncertain outcomes. We utilize portfolio theory to derive the price of a risk (i.e., variance) reduction, then we estimate willingness to pay for the same risk reduction by analyzing stated preference data using a mean-variance specification for utility. The welfare-maximizing budget allocation is determined by equating price and willingness to pay. We use our framework to make two points. First, the welfare gains from a diversified environmental policy (i.e., one composed of multiple environmental projects) depend on society's willingness to pay for policy risk reduction and the price of a risk reduction determined by the covariance between projects. In an application to salmon restoration in Maine, we find that the welfare gains from policy diversification are equal to 5 % of society's willingness to pay for salmon restoration overall. In addition, failing to account for aversion to outcome variance may lead to underestimates of willingness to pay for environmental projects and over-investment in the riskiest projects. Failing to account for aversion to variance in the number of salmon underestimates the welfare associated with salmon restoration by over 80 % and funnels all restoration into the watershed where successful restoration is most uncertain.

Suggested Citation

  • Blachly, Ben & Sims, Charles & Warziniack, Travis, 2026. "The welfare gains from diversified environmental policies," Ecological Economics, Elsevier, vol. 239(C).
    • Handle: RePEc:eee:ecolec:v:239:y:2026:i:c:s0921800925002332
    DOI: 10.1016/j.ecolecon.2025.108750
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    Keywords

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    JEL classification:

    • Q57 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Ecological Economics
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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