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A General Equilibrium Model of Environmental Option Values

  • Iain Fraser

    ()

  • Katsuyuki Shibayama

    ()

In this paper we consider the option value of the environment employing a general equilibrium growth model with a stochastic technology. In our model, as in existing studies, because of irreversibility, the environment has significant real option value. However, unlike the existing literature in which the uncertainty of the value of the environment is given exogenously, the value of the environment is endogenously determined. In our model, the elasticity of substitution eta between the environment and consumption plays a crucial role. We show that the option value, and hence, the optimal decision are both affected by eta not only quantitatively but also qualitatively.

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File URL: ftp://ftp.ukc.ac.uk/pub/ejr/RePEc/ukc/ukcedp/1107.pdf
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Paper provided by School of Economics, University of Kent in its series Studies in Economics with number 1107.

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Date of creation: Apr 2011
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Handle: RePEc:ukc:ukcedp:1107
Contact details of provider: Postal: School of Economics, University of Kent, Canterbury, Kent, CT2 7NP
Phone: +44 (0)1227 827497
Web page: http://www.kent.ac.uk/economics/

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