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Measuring sustainability under regime shift uncertainty: a resilience pricing approach

Published online by Cambridge University Press:  05 October 2010

KARL-GÖRAN MÄLER  and
CHUAN-ZHONG LI
KARL-GÖRAN MÄLER
Affiliation:
The Beijer Institute, Royal Swedish Academy of Sciences, SE-104 05 Stockholm, Sweden. Email: karl@beijer.kva.se
CHUAN-ZHONG LI
Affiliation:
Department of Economics, Uppsala University, SE-751 05 Uppsala, Sweden; The Beijer Institute, Royal Swedish Academy of Sciences, SE-104 05 Stockholm, Sweden; and Department of Economics, Zhejiang University, Hangzhou 310027, P.R. China. Email: Chuanzhong.Li@nek.uu.se
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Abstract

This paper is concerned with the theory of resilience pricing and sustainability measurement in the presence of risk for regime shift in a dynamic economy–environment system. Following Holling (Annual Review of Ecology and Systematics, vol. 4, 1973, pp. 1–23), we consider resilience as the maximal perturbation that the system can absorb without flipping into a qualitatively different state. Using a multisector growth model under uncertainty, we derive the shadow price of resilience that affects the probabilities of the system to flip in the future. We also analyze the role of resilience on sustainability with both ex-ante and ex-post welfare measures.

Type
Research Article
Information
Environment and Development Economics , Volume 15 , Issue 6: 15 YEARS OF EDE – ADVANCES AND CHALLENGES IN ENVIRONMENT AND DEVELOPMENT ECONOMICS , December 2010 , pp. 707 - 719
Copyright
Copyright © Cambridge University Press 2010

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