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The International Yearbook of Environmental and Resource Economics 2005/2006

A Survey of Current Issues

Edited by Henk Folmer and Tom Tietenberg

The Yearbook provides a comprehensive overview of cutting-edge issues in environmental and resource economics.
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Chapter 7: Valuing environmental changes in the presence of risk: an update and discussion of some empirical issues

W. Douglass Shaw, Mary Riddel and Paul M. Jakus


* W. Douglass Shaw, Mary Riddel and Paul M. Jakus 1 INTRODUCTION In this chapter we examine the current literature on valuing environmental changes that involve risk or uncertainty. We are most interested in how econometric estimation methods can be used in models to obtain ex-ante welfare measures under conditions of risk, but understanding the underlying microeconomic theory is naturally essential to pursue empirical modeling so that is also addressed. Examples below relate to changes in the environment that can affect human and ecological health and well-being.1 Much of the risk oriented economics literature is concerned with financial risk, where future income is uncertain and the focus is on tradeoffs between expected income and risk of investments. ‘Risk’ is typically measured by the variance of an asset portfolio (e.g. Pratt, 1964; Hirschleifer, 1965). While a great debt is owed to the authors of this literature, the work is perhaps only somewhat helpful in understanding how to model responses to environmental changes under risk. Another strand of economics literature focuses on human health and the risk of illness and death, but much of this literature is absent empirical values for risk changes and sometimes lacks a connection to the environment. It is nevertheless important, as it focuses on the theory relating to the value of a statistical life (VSL), and VSLs are regularly used in making environmental policy decisions (e.g. Berger et al., 1987). Still another important strand of risk literature focuses on psychological models and risk perceptions (e.g. Slovic,...

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