Environmental Risk and Welfare Valuation Under Imperfect Information

Posted: 18 Jun 2010

See all articles by Yoshifumi Konishi

Yoshifumi Konishi

Sophia University

Jay S. Coggins

University of Minnesota - College of Agricultural, Food and Environmental Sciences - Department of Applied Economics

Date Written: May 14, 2007

Abstract

Consumers are often uninformed, or unsure, about the ambient level of environmental risk. An optimal policy must jointly determine efficient levels of self-protection, information provision, and public risk mitigation efforts. Unfortunately, conventional welfare measures are not amenable to welfare analysis in the presence of imperfect information. We develop a theoretical welfare measure, called quasi-compensating variation, that is a natural extension of compensating variation (CV). We show that this welfare measure offers not only a money metric of the "value of information," but also a means to evaluate appropriately the welfare effects of various policies when consumers are imperfectly informed about ambient risk. This welfare measure allows us to obtain a number of results that the traditional CV measure fails to offer. In particular, we show that the consumer's willingness to pay for a (small) environmental risk reduction is higher for those who underestimate ambient risk than those who overestimate or are perfectly informed if the marginal return to self-protection increases with ambient risk.

Keywords: Self-protection, Environmental Risk, Value of Information, Compensating Variation

JEL Classification: D8, Q51, Q53

Suggested Citation

Konishi, Yoshifumi and Coggins, Jay S., Environmental Risk and Welfare Valuation Under Imperfect Information (May 14, 2007). Resource and Energy Economics, Vol. 30, No. 2, 2008, Available at SSRN: https://ssrn.com/abstract=1626787

Yoshifumi Konishi (Contact Author)

Sophia University ( email )

Tokyo, 102
United States

Jay S. Coggins

University of Minnesota - College of Agricultural, Food and Environmental Sciences - Department of Applied Economics ( email )

1994 Buford Avenue
St. Paul, MN 55108
United States
612-625-6232 (Phone)
612-625-2729 (Fax)

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