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

Author

Listed:
  • 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.

Suggested Citation

  • Martin F. Quaas & Stefan Baumgärtner, 2006. "Natural vs. financial insurance in the management of public-good ecosystems," Working Paper Series in Economics 34, University of Lüneburg, Institute of Economics.
    • Handle: RePEc:lue:wpaper:34
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    References listed on IDEAS

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    Keywords

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