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A real option approach to the protection of a habitat dependent endangered species

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  • Ben Abdallah, Skander
  • Lasserre, Pierre

Abstract

We use a real option approach to determine when a social planner has to stop or resume logging in situations where an endangered species relies on forest habitat for its survival. Logging affects the stochastic process followed by the habitat of the endangered species, which disappears irreversibly if its habitat reaches a critical extinction level. As long as the endangered species is still in existence, the social planner manages logging in such a way as to balance the risk of extinction against the benefits from commercial wood exploitation. The model incorporates economic, ecological, and social features. It is solved analytically to characterize the optimal forest management rule. Then it is applied to the case of the Rangifer tarandus caribou, an endangered species in Central Labrador (Canada). The parameters of the habitat process are estimated by Monte Carlo methods. The policy implied by the model – alternatively banning and resuming logging according to appropriate habitat threshold levels – turns out to be quite attractive; it does not require long banning periods while it drastically reduces the extinction risk and increases forest value.

Suggested Citation

  • Ben Abdallah, Skander & Lasserre, Pierre, 2012. "A real option approach to the protection of a habitat dependent endangered species," Resource and Energy Economics, Elsevier, vol. 34(3), pages 295-318.
  • Handle: RePEc:eee:resene:v:34:y:2012:i:3:p:295-318
    DOI: 10.1016/j.reseneeco.2011.11.003
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    References listed on IDEAS

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    1. Kassar, Ilhem & Lasserre, Pierre, 2004. "Species preservation and biodiversity value: a real options approach," Journal of Environmental Economics and Management, Elsevier, vol. 48(2), pages 857-879, September.
    2. Insley, Margaret, 2002. "A Real Options Approach to the Valuation of a Forestry Investment," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 471-492, November.
    3. Saphores, Jean-Daniel, 2003. "Harvesting a renewable resource under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 28(3), pages 509-529, December.
    4. Pindyck, Robert S., 2000. "Irreversibilities and the timing of environmental policy," Resource and Energy Economics, Elsevier, vol. 22(3), pages 233-259, July.
    5. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-638, June.
    6. Conrad, Jon M., 2000. "Wilderness: options to preserve, extract, or develop," Resource and Energy Economics, Elsevier, vol. 22(3), pages 205-219, July.
    7. Saphores, Jean-Daniel M. & Shogren, Jason F., 2005. "Managing exotic pests under uncertainty: optimal control actions and bioeconomic investigations," Ecological Economics, Elsevier, vol. 52(3), pages 327-339, February.
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    Cited by:

    1. repec:eee:ecolec:v:144:y:2018:i:c:p:59-64 is not listed on IDEAS
    2. repec:eee:eneeco:v:67:y:2017:i:c:p:1-16 is not listed on IDEAS

    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Q23 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Forestry
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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