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Policy Design as an Irreversible Investment Under Uncertainty: Norwegian Agriculture and the WTO

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  • Mittenzwei, Klaus

Abstract

This paper is concerned with the timing of an agricultural policy reform under uncertainty. The focus is on the opportunity cost of giving up the option to wait when implementing a policy reform. Including the option value in applied policy analysis can help explain why conventional analyses may find observed policies to be Pareto-inferior. Furthermore, it explains why otherwise profitable policy reforms may be delayed. The theoretical model is applied to Norwegian agricultural policy anticipating a prospective WTO agreement. It is argued that the option value should be incorporated into applied policy analysis when high uncertainty prevails.

Suggested Citation

  • Mittenzwei, Klaus, 2002. "Policy Design as an Irreversible Investment Under Uncertainty: Norwegian Agriculture and the WTO," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 24875, European Association of Agricultural Economists.
    • Handle: RePEc:ags:eaae02:24875
    DOI: 10.22004/ag.econ.24875
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    References listed on IDEAS

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    5. Abebayehu Tegene & Keith Wiebe & Betsey Kuhn, 1999. "Irreversible Investment Under Uncertainty: Conservation Easements and the Option to Develop Agricultural Land," Journal of Agricultural Economics, Wiley Blackwell, vol. 50(2), pages 203-219, May.
    6. Fisher, Anthony C & Hanemann, W Michael, 1990. "Option Value: Theory and Measurement," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 17(2), pages 167-180.
    7. Pindyck, Robert S., 2000. "Irreversibilities and the timing of environmental policy," Resource and Energy Economics, Elsevier, vol. 22(3), pages 233-259, July.
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