Irreversibilities and the Timing of Environmental Policy

32 Pages Posted: 12 Apr 2001

See all articles by Robert S. Pindyck

Robert S. Pindyck

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: January 2000

Abstract

The standard framework in which economists evaluate environmental policies is cost-benefit analysis, so policy debates usually focus on the expected flows of costs and benefits, or on the choice of discount rate. But this can be misleading when there is uncertainty over future outcomes, when there are reversibilities, and when policy adoption can be delayed. This paper shows how two kinds of uncertainty over the future costs and benefits of reduced environmental degradation, and over the evolution of an ecosystem interact with two kinds of irreversibilities - sunk costs associated with an environmental regulation, and "sunk benefits" of avoided environmental degradation - to affect optimal policy timing and design.

Keywords: Environmental policy, irreversibilities, cost-benefit analysis, uncertainty, option value, global warming

JEL Classification: Q28, L51, H23

Suggested Citation

Pindyck, Robert S., Irreversibilities and the Timing of Environmental Policy (January 2000). Available at SSRN: https://ssrn.com/abstract=229009 or http://dx.doi.org/10.2139/ssrn.229009

Robert S. Pindyck (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02139
United States
617-253-6641 (Phone)
617-258-6855 (Fax)

HOME PAGE: http://web.mit.edu/rpindyck/www/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
413
Abstract Views
4,203
Rank
130,298
PlumX Metrics