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A Bird in the Hand is Worth Two in the Bush? When Do We Prefer Something Certainly Dirty to Something Perhaps Clean?

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  • Andreas Lange
  • Ulf Moslener

Abstract

We analyze the problem of introducing a new substitute for a polluting process. The environmental effects of this substitute are uncertain but will be resolved over time. In a two-period model where two stock pollutants are substitutes in the abatement cost function, we show that the consequences of uncertainty depend critically on the degree of substitutability. As opposed to independent pollutants, for potentially large damages a further increased level of uncertainty leads to a decrease in risky emissions at the expense of emitting more of the old pollutant with known environmental effects. We illustrate how the effects of revealed uncertainty on the emission levels are affected by increasing substitutability.

Suggested Citation

  • Andreas Lange & Ulf Moslener, 2004. "A Bird in the Hand is Worth Two in the Bush? When Do We Prefer Something Certainly Dirty to Something Perhaps Clean?," Journal of Risk and Uncertainty, Springer, vol. 29(1), pages 35-51, July.
    • Handle: RePEc:kap:jrisku:v:29:y:2004:i:1:p:35-51
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    Cited by:

    1. repec:awi:wpaper:0426 is not listed on IDEAS
    2. Elke Moser & Andrea Seidl & Gustav Feichtinger, 2014. "History-dependence in production-pollution-trade-off models: a multi-stage approach," Annals of Operations Research, Springer, vol. 222(1), pages 457-481, November.

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