Scientific Progress and Irreversibility: An Economic Interpretation of the 'Precautionary Principle'

Abstract

We consider the problem of the optimal use of a good whose consumption can produce damages in the future. Scientific progress is made over time that provides information on the distribution of the intensity of damages. We show that this progress induces earlier prevention effort only if prudence is larger than twice absolute risk aversion. This paper thus identifies the class of quite restrictive but plausible conditions such that scientific uncertainties justify an immediate reduction of the consumption of a potentially toxic substance.

Keywords: irreversibility, comparison of experiments, precautionary principle, greenhouse effect, prudence

JEL Classification: D81, D91, Q25, Q28