Efficiency and applicability of economic concepts dealing with environmental risk and ignorance

The paper examines the efficiency and applicability of various economic con cepts dealing with environmental uncertainty. Their applicability is analys ed by classifying environmental uncertainty according to different criteria . Using such a structure, it can be shown that while the economic concepts are able to deal satisfactorily with some types of environmental uncertaint y they are unable to deal with others adequately. The analysis of efficienc y distinguishes between environmental risk (in which the decision-maker is aware of the distribution function of the random variables) and ignorance ( in which the decision-maker does not know the relevant distribution functio ns). The concept of a risk premium proposed by Siebert, the policy recommen dation to promote integrated technologies, and the environmental assurance bonding system developed by Costanza and Perrings are examined in terms of efficiency and applicability. The analysis reveals the following: (i) the a pplication possibilities of the three concepts differ significantly; (ii) a concept which concentrates on the reduction of risk may lead to an increas e in ignorance; (iii) while an economic concept may be efficient in the con text of risk, it can be inefficient when ignorance exists; (iv) a trade-off exists between the possibility to precisely state whether an economic conc ept is efficient and the scope of its applicability. (C) 2000 Elsevier Scie nce B.V. All rights reserved.