Optimal land conversion and growth with uncertain biodiversity costs

The aim of this paper is to characterise the trade-offs between economic growth and natural resource conservation by determining the optimal rate of conversion of a natural reserve of land. Land conversion fuels consumption growth in the private sector, while simultaneously giving rise to uncertain environmental consequences, accounted for in terms of biodiversity benefits and modelled as non-linear stochastic processes. Random processes governing ecosystem dynamics and adaptation to anthropogenic change are important sources of prevailing ecological uncertainty and contribute to the problem of how to balance economic development against natural resource conservation. In a two-sector exogenous growth framework we model a stochastic environmental good, exhibiting uncertain ecological responses to environmental change, and describe the economic and environmental trade-offs facing a risk-averse social planner. Allowing for ecological risk tends to slow economic growth if environmental impacts are assumed to increase exponentially as the rate of disturbance increases. Taken in isolation the effects of ecosystem resilience and ecological uncertainty on the rate of natural resource development are ambiguous and depend on normative parameters such as the social planner's attitude to risk and rate of time preference.