Uncertain Outcomes and Climate Change Policy Using an Expo-Power Utility Function

Abstract

Abstract This paper extends the work of Pindyck, R. S. 2012. “Uncertain Outcomes and Climate Change Policy.” Journal of Environmental Economics and Management 63 (3): 289–303. by taking into consideration a large class of different utility functions of economic agents. As in Pindyck, R. S. 2012. “Uncertain Outcomes and Climate Change Policy.” Journal of Environmental Economics and Management 63 (3): 289–303, instead of considering a social utility function that is characterized by constant relative risk aversion (C.R.R.A), we use the expo-power utility function of Saha, A. 1993. “Expo-power Utility: A ‘Flexible’ Form for Absolute and Relative Risk Aversion.” American Journal of Agricultural Economics 75 (4): 905–13. In fact, depending on the choice of the expo-power utility function parameters, we cover a diverse range of utility functions. Apart from covering the other utility functions that a C.R.R.A omits, the Expo-power utility function permits us to discern if under the other utility-regimes of economic agents, the willingness to pay remains more affected by uncertain outcomes than certain outcomes when we vary the expectation and standard deviation of the temperature’s probability distribution. Our paper has maintained the small-tailed gamma distributions of temperature and economic impact of Pindyck, R. S. 2012. “Uncertain Outcomes and Climate Change Policy.” Journal of Environmental Economics and Management 63 (3): 289–303. not only because they hinder infinite future welfare losses (for an exponential utility function), but because it is easy to change some moments of the distribution (jointly or holding the others fixed) while studying how uncertainty influences the willingness to pay as explained in Pindyck, R. S. 2012. “Uncertain Outcomes and Climate Change Policy.” Journal of Environmental Economics and Management 63 (3): 289–303.