Environmental risk and welfare valuation under imperfect information

Yoshifumi Konishi, Jay S. Coggins

Research output: Contribution to journalArticlepeer-review

12 Citations (Scopus)

Abstract

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 appropriately evaluate 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 for those who overestimate or are perfectly informed if the marginal return to self-protection increases with ambient risk.

Original languageEnglish
Pages (from-to)150-169
Number of pages20
JournalResource and Energy Economics
Volume30
Issue number2
DOIs
Publication statusPublished - 2008 May 1
Externally publishedYes

Keywords

  • Compensating variation
  • Environmental risk
  • Self-protection
  • Value of information

ASJC Scopus subject areas

  • Economics and Econometrics

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