The Welfare Cost of Uncertainty in Policy Outcomes

Edward Schlee, V. Kerry Smith

NBER Working Paper No. 22864
Issued in November 2016, Revised in March 2017
NBER Program(s):Environment and Energy Economics

This paper proposes a simple index of the welfare significance of uncertainty in the public goods resulting as policy outcomes. Our measure is the ex ante compensation an individual would require to accept an uncertain level of service compared to receiving the expected value of the distribution of possible values for that service. Our compensation measure is a function of the coefficient of relative risk aversion, the variance in the measure of environmental service associated with policy and relevant for the individual, and a set of conventional parameters that describe the properties of nonmarket benefit measures under conditions of certainty. We would expect that the inverse virtual price elasticity of the for the environmental service and the square of the coefficient of relative variation are the primary factors influencing the size of our compensation index.

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Document Object Identifier (DOI): 10.3386/w22864

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