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

The paper examines the efficiency and applicability of various economic concepts dealing with environmental uncertainty. Their applicability is analysed 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 uncertainty they are unable to deal with others adequately. The analysis of efficiency 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 functions). The concept of a risk premium proposed by Siebert, the policy recommendation 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 application possibilities of the three concepts differ significantly; (ii) a concept which concentrates on the reduction of risk may lead to an increase in ignorance; (iii) while an economic concept may be efficient in the context of risk, it can be inefficient when ignorance exists; (iv) a trade-off exists between the possibility to precisely state whether an economic concept is efficient and the scope of its applicability. © 2000 Elsevier Science B.V. All rights reserved.