Natural Vs. Financial Insurance in the Management of Public-Good Ecosystems

24 Pages Posted: 21 Mar 2006 Last revised: 27 Apr 2009

See all articles by Martin F. Quaas

Martin F. Quaas

German Centre for Integrative Biodiversity Research (iDiv) Halle-Jena-Leipzig

Stefan Baumgärtner

University of Freiburg - Department of Environment and Natural Resources

Date Written: July 7, 2007

Abstract

In the face of uncertainty, ecosystems can provide natural insurance to risk averse users of ecosystem services. We employ a conceptual ecological-economic model to analyze the allocation of (endogenous) risk and ecosystem quality by risk averse ecosystem managers who have access to financial insurance, and study the implications for individually and socially optimal ecosystem management, and policy design. We show that while an improved access to financial insurance leads to lower ecosystem quality, the effect on the free-rider problem and on welfare is determined by ecosystem properties. We derive conditions on ecosystem functioning under which, if financial insurance becomes more accessible, (i) the extent of optimal regulation increases or decreases; and (ii) welfare, in the absence of environmental regulation, increases or decreases.

Keywords: ecosystem quality, ecosystem services, ecosystem management, endogenous environmental risk, insurance, risk-aversion, uncertainty

JEL Classification: Q57, H23, D81, D62

Suggested Citation

Quaas, Martin F. and Baumgärtner, Stefan, Natural Vs. Financial Insurance in the Management of Public-Good Ecosystems (July 7, 2007). Ecological Economics, Vol. 65, No. 2, 2008. Available at SSRN: https://ssrn.com/abstract=892104

Martin F. Quaas (Contact Author)

German Centre for Integrative Biodiversity Research (iDiv) Halle-Jena-Leipzig ( email )

Deutscher Platz 5e
Leipzig, 04103
Germany

HOME PAGE: http://www.idiv.de/bioecon

Stefan Baumgärtner

University of Freiburg - Department of Environment and Natural Resources ( email )

Tennebacher Str. 4
Freiburg, 79106
Germany

HOME PAGE: http://www.ere.uni-freiburg.de

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