Abstract
This paper concerns the irreversibilitity effect in stock externalities. In an environment of uncertainty with learning taking place, one may wish to under-emit today to avoid potential environmental irreversibilities. Alternatively, one may wish to under-invest in pollution control capital, avoiding investments in sunk capital that turn out to be wasted. The paper reviews theoretical results on the tension between these two effects and separates risk aversion from the irreversibility effect. The paper also presents a simple example of climate change policy.
Research supported by NSF Grant SBR-94-96303 and DOE Grant DE-FG03-94ER61944. Work conducted in part while the author was visiting the Catholic University of Leuven in Belgium and in part while on the faculty of the University of Illinois at Urbana-Champaign. Parts of this paper appeared in Kolstad (1996).
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Arrow, K. (1968) Optimal Capital Policy and Irreversible Investment. In: J.N. Wolfe (Ed.) Value, Capital and Growt. Aldine, Chicago.
Arrow, K.J. and A.C. Fisher (1974) Environmental Preservation, Uncertainty and Irreversibility. Quarterly I. Econ., 88, pp. 312–319.
Epstein, L. G. (1980) Decision Making and the Temporal Resolution of Uncertainty. Intl Economic Review, 21, pp. 269–83.
Freixas, X. and J.J. Laffont (1984) The Irreversibility Effect. In: M. Boyer and R. Khilstrom (Eds.) Bayesian Models in Economic Theory, North-Holland, Amsterdam.
Gore, A. (1992) Earth in the Balance. Houghton-Mifflen, New York.
Kolstad, C. D. (1993) Looking vs. Leaping: The Timing of CO 2 Control in the Face of Uncertainty and Learning. In: Y. Kaya, N. Nakicenovic, W.D. Nordhaus and F.L. Toth (Eds.) Costs, Impacts and Benefits of CO 2 Mitigation, IIASA, Austria.
Hanemann, W. M. (1989) Information and the Concept of Option Value. J. Env. Econ. and Mgmt., 16, pp. 23–37.
Henry, C. (1974) Investment Decisions Under Uncertainty: The Irreversibility Effect. Amer. Econ. Rev., 64, pp. 1006–12.
Kolstad, C. D. (1996) Fundamental Irreversibilities in Stock Externalities. J. Public Economics forthcoming
Laffont, J. J. (1980) Essays in the Economics of Uncertainty. Harvard University Press, Cambridge, Mass.
Laffont, J.J. The Economics of Uncertainty and Information. MIT Press, Cambridge, Mass.
Malinvaud, E. (1969) First Order Certainty Equivalence, Econometrica, 37, pp. 706–718.
Simon, H. (1956) Dynamic Programming Under Uncertainty with a Quadratic Criterion Function. Econometrica, 24, pp. 74–81.
Theil, H. (1957) A Note on Certainty Equivalence in Dynamic Planning. Econometrica, 25, pp. 346–349.
Ulph, A. and D. Ulph (1994a) Global Warming: Why Irreversibility May Not Require Lower Current Emissions of Greenhouse Gases. Discussion Paper 9402, Department of Economics, University of Southampton, UK.
Ulph, A. and D. Ulph (1994b) The Irreversibility Effect Revisited. Mimeo.
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 1996 Springer-Verlag Berlin Heidelberg
About this paper
Cite this paper
Kolstad, C.D. (1996). Uncertainty, Learning, Stock Externalities and Capital Irreversibilities. In: van Ierland, E.C., Görka, K. (eds) Economics of Atmospheric Pollution. NATO ASI Series, vol 14. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-61198-8_2
Download citation
DOI: https://doi.org/10.1007/978-3-642-61198-8_2
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-642-64744-4
Online ISBN: 978-3-642-61198-8
eBook Packages: Springer Book Archive