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Optimal Land Conversion And Growth With Uncertain Biodiversity Costs

  • Anke Leroux
  • John Creedy

An important characteristic defining the threat of environmental crises is the uncertainty about their consequences for future welfare. Random processes governing ecosystem dynamics and adaptation to anthropogenic change are important sources of prevailing ecological uncertainty and contribute to the problem of how to balance economic development against natural resource conservation. The aim of this study is to examine optimal growth subject to non-linear dynamic environmental constraints. In a two-sector exogenous growth framework we model a stochastic environmental good, exhibiting uncertain ecological responses to environmental change, and describe the economic and environmental trade-offs that ensue for a risk-averse social planner. Allowing for ecological risk tends to slow economic growth if environmental impacts are assumed to increase exponentially as the rate of disturbance increases. Taken in isolation the effects of ecosystem resilience and ecological uncertainty on the rate of natural resource development are ambiguous and depend on normative parameters such as the social planner’s attitude to risk and rate of time preference.

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File URL: http://www.economics.unimelb.edu.au/downloads/wpapers-05/957.pdf
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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 957.

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Length: 22 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:mlb:wpaper:957
Note: This paper is forthcoming (2006) in: Creedy, J. and Leroux, A. , Optimal Land Conversion and Growth with Uncertain Biodiversity Costs, Ecological Economics.
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