The Optimal Management of a Natural Resource with Switching Dynamics

IED Working Paper No. 19

38 Pages Posted: 14 Dec 2012

See all articles by Michele Baggio

Michele Baggio

PEPE - Professorship of Environmental Policy and Economics; ETH Zürich - Institute vor Environmental Decisions (IED)

Date Written: November 20, 2012

Abstract

This paper analyzes the optimal management of a natural resource that can shift between different dynamics at random times. Using a classical linear control model I investigate how the switching behavior influences the optimal extraction of the resource. I use exogenous sea-surface temperature anomalies to study how future climate change affects the optimal management of the resource. The model is applied to the Peruvian anchoveta fishery, which has shown evidence of structural differences in the biological relationship over time. Results indicate that a management policy that adapts to a changing dynamic leads to mean biomass and resource rents that are 2 and 2.5 times higher than a non-adaptive policy. This analysis provides a framework that can be used to quantitatively address the effects of adaptation in the context of a natural resource. Specifically, it gives important indications for the management of a natural resource with alternating dynamics, which can be used to design policies that adapt to the variability of the physical environment.

Keywords: Bioeconomic modeling, Climate change, Peruvian anchoveta, Real option, Regime switching

JEL Classification: C61, Q22, Q54, Q57

Suggested Citation

Baggio, Michele and Baggio, Michele, The Optimal Management of a Natural Resource with Switching Dynamics (November 20, 2012). IED Working Paper No. 19, Available at SSRN: https://ssrn.com/abstract=2187811 or http://dx.doi.org/10.2139/ssrn.2187811

Michele Baggio (Contact Author)

ETH Zürich - Institute vor Environmental Decisions (IED) ( email )

Weinbergstrasse 35
Zurich, 8092
Switzerland

PEPE - Professorship of Environmental Policy and Economics ( email )

Universitaetsstrasse 22
CHN K75.1
Zurich, 8092
Switzerland
+41 44 632 32 25 (Phone)

HOME PAGE: http://www.pepe.ethz.ch/people/mbaggio

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