Archive for February, 2015

Harvesting in a Fishery with Stochastic Growth and a Mean-Reverting Price

February 14, 2015

EREAt the end of last year, my research team got a study accepted in Environmental & Resource Economics. Our long and unsexy title — Harvesting in a Fishery with Stochastic Growth and a Mean-Reverting Price — tells only part of the story (but as much as we could fit!): We study a fish harvest model in two stochastic state variables (stock and price), where the price further is mean-reverting. Perhaps the most important finding is our demonstration of the complexity that arises in relatively simple models. The complex behavior of the optimal solution that we observe is difficult to understand intuitively, something which gave us a hard time in the peer-review process. As it should be, I guess. Anyway, our abstract reads as follows:

We analyze a continuous, nonlinear bioeconomic model to demonstrate how stochasticity in the growth of fish stocks affects the optimal exploitation policy when prices are stochastic, mean-reverting and possibly harvest dependent. Optimal exploitation has nonlinear responses to the price signal and should be conservative at low levels of biological stochasticity and aggressive at high levels. Price stochasticity induces conservative exploitation with little or no biological uncertainty, but has no strong effect when the biological uncertainty is larger. We further observe that resource exploitation should be conservative when the price reverts slowly to the mean. Simulations show that, in the long run, both the stock level and the exploitation rate are lower than in the deterministic solution. With a harvest-dependent price, the long-run price is higher in the stochastic system. The price mean reversion rate has no influence on the long-run solutions.

Economics of Climate Change: A Problem from Hell

February 13, 2015

The economics demigod Martin Weitzman recently published a review of William Nordhaus’ The Climate Casino: Risk, Uncertainty, and Economics for a Warming World, where he provides the following characterization of the climate change economics problem:

The economics of climate change is a problem from hell. Trying to do a benefit-cost analysis […] of climate change policies bends and stretches the capability of our standard economist’s toolkit up to, and perhaps beyond, the breaking point. First and foremost, disconcertingly large uncertainties are everywhere, including the most challenging kinds of deep structural uncertainties. The climate change problem unfolds over centuries and millennia, a long intergenerational human time frame that most people are entirely unaccustomed to thinking about. With such long time frames, discounting becomes ultra-decisive for [benefit-cost analysis], and there is much debate and confusion about which long-run discount rate should be chosen. Irreversibilities abound, including the very long residence lifetime of atmospheric CO2. To add to the challenge, costs of new carbon-free technologies are uncertain. More importantly, for global mean temperature changes much above about 2 [degrees] C, estimating damages is mostly educated guesswork with a distressingly wide error cone. The evaluation and aggregation of such damages add yet another significant layer of uncertainty; we are even unsure even about what form the “damages function” should take. Climate change due to high [greenhouse gas] levels involves nonnegligible tail risks of low-probability catastrophic outcomes, ranging from “known unknown” tipping points to the “unknown unknowns” of black-swan bad-feedback events that we cannot even imagine today.

Striking. The review was published in the Review of Environmental Economics and Policy.

Quote of the Day

February 5, 2015

JaynesQuote