TY  - JOUR
AU  - Pindyck,Robert S.
TI  - Uncertainty In Environmental Economics
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12752
PY  - 2006
Y2  - December 2006
UR  - http://www.nber.org/papers/w12752
L1  - http://www.nber.org/papers/w12752.pdf
N1  - Author contact info:
Robert S. Pindyck
MIT Sloan School of Management
100 Main Street, E62-522
Cambridge, MA  02142
Tel: 617/253-6641
Fax: 617/258-6855
E-Mail: RPINDYCK@MIT.EDU
AB  - 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.
ER  -