Uncertainty, Irreversibility and the Optimal Timing of Large-Scale Investments in Protected Species Habitat Restoration

Abstract

We present a model of the optimal timing of a large-scale habitat restoration project. The model is a dynamic benefit optimization that includes ecosystem costs caused by the presence of a large dam. We use a single stochastic variable to incorporate two sources of uncertainty: uncertainty about how ecosystem costs will evolve over time and the possibility of the ecosystem jumping to an undesirable state. We use our model to illustrate two main results. First, variability in ecosystem costs creates an incentive to delay a project intended to restore ecosystem health. The uncertainty regarding ecosystem costs creates an option value to waiting to invest in restoration at a later date. Second, the possibility of jumping to an irreversible and unacceptably bad ecosystem state (such as species extinction) creates an incentive to hasten restoration. These results formalize the countervailing incentives faced by policy makers when multiple uncertainties and irreversibilities are present in managed ecosystems.