When Does Natural Science Uncertainty Translate into Economic Uncertainty?
Understanding the connection between ecological and economic uncertainty matters when calculating damage estimates used to inform environmental policy. Identifying the role uncertainty plays in market damage estimates is important for policy made using highly variable and stochastic projections on ecological losses. Herein we use the damages caused by invasive species as our motivating example to illustrate our point. We examine how a key economic assumption—the degree of substitutability across marketable goods—influences the importance of narrowing the uncertainty of ecological losses from invasive species. We use a computable general equilibrium model (CGE) capable of evaluating impacts from an invasive species under varying market structures. Focusing in on the emerald ash borer which is destroying ash trees throughout the contiguous United States, our results show why investing in narrowing natural science uncertainty is critical when the economy is constrained or when few economic substitutes exist. The key to understanding the value of natural science information on market damages is to understand how prices adjust given substitution possibilities and how people adapt to the newly invaded world. Mapping this ecological-economic relationship through relative prices has implications for a broader set of environmental issues like climate change and damage compensation given a damaged ecosystem.
McDermott, S. M., Finnoff, D. C., Shogren, J. F., Kennedy, C. J. (2021). When does natural science uncertainty translate into economic uncertainty?. Ecological Economics, 184, Article 106999. http://doi.org/10.1016/j.ecolecon.2021.106999