Handbook of Environmental and Resource Economics
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Handbook of Environmental and Resource Economics

Edited by Jeroen C.J.M. van den Bergh

This major reference book comprises specially commissioned surveys in environmental and resource economics written by an international team of experts. Authoritative yet accessible, each entry provides a state-of-the-art summary of key areas that will be invaluable to researchers, practitioners and advanced students.
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Chapter 14: Endogenous Environmental Risk

T.D. Crocker and J.F. Shogren


Thomas D.Crocker and Jason I;: Shogren 1. Introduction Environmental risk is defined by two elements - the likelihood that an unfavourable event will occur and the severity of the event if realized (for example, Whyte and Burton, 1980; Lowrance, 1980). Scientistsincreasingly acknowledge that individual choice can affect environmental risk (Starr, 1969), especially given the incomplete set of contingent claims or insurance markets that characterize environmental goods. As Marshall (1976) shows, when these markets are incomplete, risk must be endogenous: the individual might privately influence many of the environmental risks he or she confronts. Insurance would simply compensate the losses suffered by the individual who has paid the appropriate premium when an undesirable outcome is realized. Insurance alone does not alter the risk of this outcome. Examples of endogenous risk in which the individual can choose to alter outcomes abound. People move or reduce physical activities when air pollution becomes intolerable. They buy bottled water if they suspect alternative supplies are polluted. They chelate children who have high blood-lead concentrations, and they apply sunscreen to protect their skins from UV radiation. A person invests in a water filter, moves, buys membership to a health club, jogs, eats food low in fat and high in fibre, or applies sunscreen, each choice altering his or her risk to health and welfare. How people invest resources to increase the likelihood that good things happen or bad things do not depends on both their attitudes toward risk and their technology to reduce it (Arrow, 1963;...

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