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An Analysis of the Dismal Theorem

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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.

Suggested Citation

  • William D. Nordhaus, 2009. "An Analysis of the Dismal Theorem," Cowles Foundation Discussion Papers 1686, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:1686
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    File URL: http://cowles.yale.edu/sites/default/files/files/pub/d16/d1686.pdf
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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. repec:wsi:ccexxx:v:06:y:2015:i:02:n:s2010007815500098 is not listed on IDEAS
    4. Jorge Fernández & Sebastián J. Miller, 2011. "When Should Developing Countries Announce Their Climate Policy?," IDB Publications (Working Papers) 3960, Inter-American Development Bank.
    5. Dietz, Simon, 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.
    6. Kelly, David L. & Tan, Zhuo, 2015. "Learning and climate feedbacks: Optimal climate insurance and fat tails," Journal of Environmental Economics and Management, Elsevier, vol. 72(C), pages 98-122.
    7. Ikefuji, Masako & Laeven, Roger J.A. & Magnus, Jan R. & Muris, Chris, 2015. "Expected utility and catastrophic consumption risk," Insurance: Mathematics and Economics, Elsevier, vol. 64(C), pages 306-312.
    8. Dellink, Rob & Finus, Michael, 2012. "Uncertainty and climate treaties: Does ignorance pay?," Resource and Energy Economics, Elsevier, vol. 34(4), pages 565-584.
    9. repec:taf:jsustf:v:7:y:2017:i:3:p:233-274 is not listed on IDEAS
    10. Baum, Seth D., 2009. "Description, prescription and the choice of discount rates," Ecological Economics, Elsevier, vol. 69(1), pages 197-205, November.
    11. Dietz, Simon, 2011. "High impact, low probability?: an empirical analysis of risk in the economics of climate change," LSE Research Online Documents on Economics 38586, London School of Economics and Political Science, LSE Library.
    12. Barrett, Scott, 2013. "Climate treaties and approaching catastrophes," Journal of Environmental Economics and Management, Elsevier, vol. 66(2), pages 235-250.
    13. repec:eee:macchp:v2-1893 is not listed on IDEAS
    14. Rob Dellink & Thijs Dekker & Janina Ketterer, 2013. "The Fatter the Tail, the Fatter the Climate Agreement," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 56(2), pages 277-305, October.

    More about this item

    Keywords

    Dismal theorem; Uncertainty; Climate change; Catastrophes;

    JEL classification:

    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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