Pattern Formation, Spatial Externalities and Regulation in Coupled Economic-Ecological Systems

Abstract

We develop a novel theoretical framework for studying ecosystems in which interacting state variables which are affected by management decisions diffuse in space. We identify (i) mechanisms creating spatial patterns when economic agents maximize profit at each site by ignoring the impact of their actions on other sites and (ii) a diffusion induced externality. Pattern formation mechanisms and externalities create a divergence in the spatiotemporal structures emerging under private or social objectives We develop optimal regulation which internalize the spatiotemporal externalities. Our theory is applied to the management and regulation of a semi-arid system. Supporting numerical simulations are also presented.

Keywords: Economic-Ecological Systems, Pattern Formation, Reaction-Diffusion, Diffusion Instability, Spatial Externalities, Regulation

JEL Classification: Q20, C61, H23