# A General Equilibrium Model of Environmental Option Values

Shibayama, Katsuyuki and Fraser, Iain M (2011) A General Equilibrium Model of Environmental Option Values. Discussion paper. School of Economics, University of Kent at Canterbury, Kent, UK

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## Abstract

In this paper we consider the option value of the environment employing a stochastic general equilibrium growth model. In our model, as in existing studies, because of irreversibility, the environment has significant real option value. However, unlike the existing literature, the value of the environment is endogenously determined in our general equilibrium setting. In our model, the elasticity of substitution between the environment and consumption not only has quantitative effects but also qualitative effects on the option value of the environment and the optimal allocation of land. We also show that the volatility of the exogenous shock process has quantitatively significant effects on the size of the option value which has important implications for the practical estimation of environmental option values.

Item Type: Monograph (Discussion paper) Real option; environment; general equilibrium; elasticity of substitution; generalized isoelastic preference H Social Sciences > HB Economic Theory Faculties > Social Sciences > School of Economics Katsuyuki Shibayama 21 Dec 2018 05:36 UTC 01 Aug 2019 10:44 UTC https://kar.kent.ac.uk/id/eprint/71413 (The current URI for this page, for reference purposes) https://orcid.org/0000-0003-3472-398X https://orcid.org/0000-0002-4689-6020