Adaptation and the option value of uncertain environmental resources

Abstract

Just as ecology has benefited from the economic theory of optimization, economics can benefit from the ecological theory of adaptation. We examine the impact of short-term, non-genetic adaptive self-protection on the values individuals attach to uncertain prospective environmental resources. We demonstrate that collective provision of reductions in supply uncertainty does not necessitate a positive option value, given that uncertainty is influenced by the individual's ability to adapt through self-protection. We conclude that the total value of reducing the supply uncertainty of a natural resource is reflected in both the individual's option price payments for collective provision and in his willingness-to-pay for adaptation through self-protection. By ignoring adaptive self-protection, traditional benefit–cost analysis has systematically underestimated the total value of environmental resources that are characterized by uncertain supplies.