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The Welfare Cost of Uncertainty in Policy Outcomes

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  • Edward Schlee
  • V. Kerry Smith

Abstract

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.

Suggested Citation

  • Edward Schlee & V. Kerry Smith, 2016. "The Welfare Cost of Uncertainty in Policy Outcomes," NBER Working Papers 22864, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:22864
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    More about this item

    JEL classification:

    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

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