A Note on Environmental Decisions Under Uncertainty - The Impact of the Choice of the Welfare Measure

No 415, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: The paper addresses the question, how environmental policy decisions under uncertainty depend on the underlying welfare concept. We study three different welfare measures: The first is directly based on the ex ante (expected) utility of a representative consumer whereas the second and the third are based on a valuation of policy changes compared to the status quo. Here the second criterion is based on the ex ante, the third on the ex post willingness-to-pay for policy changes with respect to the status quo. We show that decisions based on these measures coincide if and only if a risk neutral expected utility maximization is applied. Differences between the decisions are analyzed for both, risk averse expected utility maximization and the MaxiMin criterion. For risk-averse decision makers differences between the first and the second concept arise if the absolute risk-aversion of the decision maker is not constant in income. For risk aversion and the MaxiMin criterion, emission levels based on an optimization of ex post utility changes, e.g. abatement costs, exceed those based on the first or second concept if a reduction of emissions is socially optimal. Implications for applying the concepts of abatement costs and benefits from abatement are discussed.

Date: Written 2000-08-01
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