Environmental Risk and Welfare Valuation under Imperfect Information, Resource and Energy Economics (2008) 30(2), 150-169 (with Jay Coggins)

Resource and Energy Economics (2008) 30(2), 150-169 (with Jay Coggins)

Consumers are often uninformed, or unsure, about the ambient level of environmental risk. An optimal policy must jointly determine efficient levels of self-protection, information provision, and public risk mitigation efforts. Unfortunately, conventional welfare measures are not amenable to welfare analysis in the presence of imperfect information. We develop a theoretical welfare measure, called quasi-compensating variation, that is a natural extension of compensating variation (CV). We show that this welfare measure offers not only a money metric of the “value of information,” but also a means to evaluate appropriately the welfare effects of various policies when consumers are imperfectly informed about ambient risk. This welfare measure allows us to obtain a number of results that the traditional CV measure fails to offer. In particular, we show that the consumer’s willingness to pay for a (small) environmental risk reduction is higher for those who underestimate ambient risk than those who overestimate or are perfectly informed if the marginal return to self-protection increases with ambient risk. (PDF)
Copyright 2017 Yoshifumi Konishi All Rights Reserved.