Irreversibility and uncertainty in species valuation
Name
35721623.pdf
Size
1.85 MB
Format
Adobe PDF
Checksum (MD5)
dee7c16a6d3704f7d69cb40af77854c4
Author(s)
Brooks, Eileen L.
Date Issued
1994
Publisher
MIT Center for Energy and Environmental Policy Research
Series/Report no.
MIT-CEEPR (Series) ; 94-007WP.
Abstract
This paper incorporates an option value into deforestation policy analysis. Similar to an option value in finance, the option value here reflects the advantage to delaying irreversible species extinction until more information about the uncertain value of species is known. The return from species is modeled as a stochastic flow of benefits which ceases if policy makers choose to deforest. Deforestation produces known profits from wood, and agriculture or ranching. Model variations include using geometric Brownian motion and a Poisson jump process to model the variation in species values, and the effect of considering whether "harvesting" of species can occur during deforestation. The model demonstrates that uncertainty over the value of species should encourage forest protection beyond what present discounted value comparisons (traditional cost-benefit analysis) would imply. Data from studies of Brazil's Amazonia region are used to provide numerical examples of the differences between traditional cost-benefit methods and the option-theoretic approach described here.
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