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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.

Suggested Citation

  • Michele Baggio, 2012. "The Optimal Management of a Natural Resource with Switching Dynamics," IED Working paper 12-19, IED Institute for Environmental Decisions, ETH Zurich.
  • Handle: RePEc:ied:wpsied:12-19
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    File URL: http://www.ied.ethz.ch/pub/pdf/IED_WP19_Baggio.pdf
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    More about this item

    Keywords

    Bioeconomic modeling; Climate change; Peruvian anchoveta; Real option; Regime switching;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • Q22 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Fishery
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q57 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Ecological Economics

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