| 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. |