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Environmental risk and welfare valuation under imperfect information

  • Konishi, Yoshifumi
  • Coggins, Jay S.

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.

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Article provided by Elsevier in its journal Resource and Energy Economics.

Volume (Year): 30 (2008)
Issue (Month): 2 (May)
Pages: 150-169

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Handle: RePEc:eee:resene:v:30:y:2008:i:2:p:150-169
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505569

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