A Bird in the Hand is Worth Two in the Bush? When do We Prefer Something Certainly Dirty to Something Perhaps Clean?

We analyze the problem of introducing a new substitute for a polluting process while the environmental effects of this substitute are uncertain but will be resolved over time. The chlorofluorocarbons may serve as an example. We set up a two period model where two stock pollutants enter the abatement cost function as substitutes. We show that the consequences of uncertainty depend critically on the degree of substitutability. As opposed to independent pollutants, for large potential damages a further increased uncertainty leads to a decrease of the risky emissions at the expense of emitting more of the old pollutant with known environmental effects. We illustrate how the effects of revealed uncertainty on the emission levels are affected by increasing substitutability.

Lange, Andreas and Ulf Moslener (2002), A Bird in the Hand is Worth Two in the Bush? When do We Prefer Something Certainly Dirty to Something Perhaps Clean? , Universität Heidelberg, Wirtschaftswissenschaftliche Fakultät, Discussion Papers, Heidelberg