Environmental and Natural Resource Economics: Decisions Under Risk and Uncertainty
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2013 Elsevier Inc. All rights reserved. This article presents the economics of risk and uncertainty focusing on how they pertain and relate to resource economics, which includes both environmental and natural resource economics. Risk, with known probabilities, is prominent in work that connects human health to environmental stressors such as air pollutants and contaminants in drinking water and in resource extraction situations where information is reasonable. Uncertainty, with the extreme being no knowledge of probabilities, may also arise in contexts such as climate change, global warming, or situations where little is currently known. The basic economic model of expected utility is described and connected to nonmarket valuation (i.e., maximum willingness to pay to reduce risk). The risk-related welfare measures such as option value and option price are described. A short list and description of topics that go beyond the basic framework conclude the article. These include endogenous risk, subjective probability and perceived risks, Bayesian analysis, and robust optimal control.
