Ecosystem resilience may provide economic insurance

Abstract

Ecosystem resilience, i.e. an ecosystem's ability to maintain its basic functions and controls under disturbances, is often interpreted as insurance: by decreasing the probability of future drops in the provision of ecosystem services, resilience insures risk-averse ecosystem users against potential welfare losses. Using a general and stringent definition of “insurance” and a simple ecological–economic model, we derive the (marginal) economic insurance value of ecosystem resilience and study how it depends on ecosystem properties, economic context, and the ecosystem user's risk preferences. In particular, we study how different types of subjective risk aversion affect the insurance property. To this end, we compare (constant absolute or relative) risk aversion under standard expected utility theory, and strong downside-risk aversion under mean-downside-variance preferences. As an empirical illustration, we employ data from the Goulburn-Broken Catchment farmland in South-East Australia, which is threatened by salinization due to rising groundwater tables. We show that whether ecosystem resilience actually provides economic insurance to risk-averse farmers, crucially depends on the exact type of farmers’ risk preferences. stefan.baumgaertner@ere.uni-freiburg.de