Abstract
At many points in earlier chapters we have had occasion to draw the reader’s attention to the problem of uncertainty. Uncertainty concerning stocks of fossil fuels, future price trends, technical changes and the appearance of a ‘backstop technology’ were referred to in Chapters 2 and 3. In Chapter 4 uncertainty about future demand for energy was observed to create problems for pricing and investment policy. Uncertainty about the hazards associated with various environmental pollutants is clearly important in the context of the analysis in Chapter 5, while uncertainty about future price and cost trends and the probability of discovering deposits of fossil fuel was observed to play a large part in determining policy towards taxation in Chapter 6.
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Notes and References
Most modern textbooks cover this area well, e.g. W. Nicholson, Micro Economic Theory (New York: Dryden Press, 1978) chap. 6, pp. 147–78.
For a more detailed exposition see J. Hirshleifer, ‘Investment Decisions under Uncertainty: Choice-Theoretic Approaches’, Quarterly Journal of Economics, vol. 79, no. 4 (1965) pp. 509–36.
The present analysis follows closely that of J. Hirshleifer and D. L. Shapiro, ‘The Treatment of Risk and Uncertainty’, Quarterly Journal of Economics, vol. 77, no. 4 (1963) pp. 505–30.
Fear of the takeover raid may result in managers wishing to avoid low returns. See, e.g., R. Marris, The Economic Theory of ‘Managerial’ Capitalism (London: Macmillan, 1964).
For a definition of Pareto optimality under condition of uncertainty and the derivation of appropriate rules for public investments see A. Sandmo, ‘Discount Rates for Public Investment under Uncertainty’, International Economic Review, vol. 13, no. 2 (June 1972) pp. 287–302.
K. J. Arrow and R. C. Lind, ‘Uncertainty and the Evaluation of Public Investment Decisions’, American Economic Review, vol. 60. (June 1970) pp. 364–78.
For a more detailed discussion of this case see. A. C. Fisher and J. V. Krutilla, ‘Valuing Long-Run Ecological Consequences and Irreversibilities’, in H. Peskin and E. Seskin (eds), Cost Benefit Analysis and Water Pollution Policy (Washington, D.C.: The Urban Institute, 1975) pp. 271–90.
C. Henry, ‘Irreversible Decisions under Uncertainty’, American Economic Review, vol. 64, no. 6 (Dec 1974) pp. 1006–12.
For more details see Final Report by the Energy Policy Project of the Ford Foundation, A Time to Choose (New York: Ballinger, 1974) pp. 208–10. Also Royal Commission on Environmental Pollution, 6th Report, Nuclear Power and the Environment, Cmnd 6618 (London: H.M.S.O., 1976) chap. 8.
B. A. Weisbrod, ‘Collective-Consumption Services of Individual Consumption Goods’, Quarterly Journal of Economics, vol. 78 (Aug 1964) pp. 471–7.
C. J. Cicchetti and A. Myrick Freeman III, ‘Option Demand and Consumer Surplus: Further Comment’, Quarterly Journal of Economics, vol. 85 (Aug 1971) pp. 528–39.
K. J. Arrow and A. C. Fisher, ‘Environmental Preservation, Uncertainty and Irreversibility’, Quarterly Journal of Economics, vol. 88 (May 1974) pp. 312–19. The exposition which follows relies heavily on this article and the work of Fisher and Krutilla, op. cit.
For excellent and fuller surveys in this field see W. J. Baumol, Economic Theory and Operations Analysis, 2nd ed. (Eaglewood Cliffs, N.J.: Prentice-Hall, 1965) chap. 24.
Also E. J. Mishan, Cost Benefit Analysis (London: Allen & Unwin, 1971);
and R. Dorfman, ‘Decision Rules under Uncertainty’, in Cost-Benefit Analysis, ed. R. Layard (Harmondsworth: Penguin Books, 1972), reprinted from ‘Basic Economic and Technologic Concepts: a general statement’, in A. Maass et al., Design of Water Resource Systems (Cambridge, Mass.: Harvard University Press, 1962) pp. 129–58.
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© 1980 Michael G. Webb and Martin J. Ricketts
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Webb, M.G., Ricketts, M.J. (1980). Uncertainty and Energy Policy. In: The Economics of Energy. Palgrave, London. https://doi.org/10.1007/978-1-349-16323-6_7
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