Using real options theory to a country's environmental policy: considering the economic size and growth

The aim of this paper is to consider how the economic size and growth of a country affect its environmental policy under uncertainty in a real options framework. In contrast to the prior literature, this work explicitly takes into account the link between the development of an economy and the pollution state of the environment. Policy implementation is found to be determined by the levels of the economic size and the disutility of the pollution. We illustrate how to apply our method to the implementation of an environmental policy in an actual situation and show with numerical calculations that the optimal threshold is sensitive only to the subjective time preference, while the expected implementation time is affected by other parameters.