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An Analysis of the Dismal Theorem

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  • William D. Nordhaus

Abstract

In a series of papers, Martin Weitzman has proposed a Dismal Theorem. The general idea is that, under limited conditions concerning the structure of uncertainty and preferences, society has an indefinitely large expected loss from high-consequence, low-probability events. Under such conditions, standard economic analysis cannot be applied. The present study is intended to put the Dismal Theorem in context and examine the range of its applicability, with an application to catastrophic climate change. I conclude that Weitzman makes an important point about selection of distributions in the analysis of decision-making under uncertainty. However, the conditions necessary for the Dismal Theorem to hold are limited and do not apply to a wide range of potential uncertain scenarios.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 814577000000000116.

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Date of creation: 04 Feb 2009
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Handle: RePEc:cla:levarc:814577000000000116

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Cited by:
  1. Hennlock, Magnus, 2009. "Robust Control in Global Warming Management: An Analytical Dynamic Integrated Assessment," Discussion Papers dp-09-19, Resources For the Future.
  2. Horowitz, John & Lange, Andreas, 2014. "Cost–benefit analysis under uncertainty — A note on Weitzman's dismal theorem," Energy Economics, Elsevier, vol. 42(C), pages 201-203.
  3. Baum, Seth D., 2009. "Description, prescription and the choice of discount rates," Ecological Economics, Elsevier, vol. 69(1), pages 197-205, November.
  4. Simon Dietz, 2009. "High impact, low probability? An empirical analysis of risk in the economics of climate change," LSE Research Online Documents on Economics 37612, London School of Economics and Political Science, LSE Library.
  5. Dellink, Rob & Finus, Michael, 2012. "Uncertainty and climate treaties: Does ignorance pay?," Resource and Energy Economics, Elsevier, vol. 34(4), pages 565-584.
  6. Barrett, Scott, 2013. "Climate treaties and approaching catastrophes," Journal of Environmental Economics and Management, Elsevier, vol. 66(2), pages 235-250.
  7. Rob Dellink & Thijs Dekker & Janina Ketterer, 2013. "The Fatter the Tail, the Fatter the Climate Agreement," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 56(2), pages 277-305, October.

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