Uncertainty In Environmental Economics

Robert Pindyck

No 12752, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In a world of certainty, the design of environmental policy is relatively straightforward, and boils down to maximizing the present value of the flow of social benefits minus costs. But the real world is one of considerable uncertainty -- over the physical and ecological impact of pollution, over the economic costs and benefits of reducing it, and over the discount rates that should be used to compute present values. The implications of uncertainty are complicated by the fact that most environmental policy problems involve highly nonlinear damage functions, important irreversibilities, and long time horizons. Correctly incorporating uncertainty in policy design is therefore one of the more interesting and important research areas in environmental economics. This paper offers no easy formulas or solutions for treating uncertainty -- to my knowledge, none exist. Instead, I try to clarify the ways in which various kinds of uncertainties will affect optimal policy design, and summarize what we know and don't know about the problem.

JEL-codes: D81 L51 Q28 (search for similar items in EconPapers)
Date: 2006-12
New Economics Papers: this item is included in nep-agr, nep-ene and nep-env
Note: IO EEE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as Pindyck, Robert S. "“Uncertainty in Environmental Economics." Review of Environmental Economics and Policy (Winter 2007).

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Working Paper: Uncertainty in Environmental Economics (2006)
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