01 Feb 2009

Martin Weitzman: Do "Fat Tails" Destroy Cost-Benefit Analysis?

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Over at Master Resource I sketch what’s going on with Martin Weitzman’s critique of standard models of uncertainty in the climate change debate. Some excerpts:

Weitzman argues that in this situation, standard cost-benefit analysis (CBA) breaks down. When some of the potential outcomes involve the deaths of hundreds of millions of people, not to mention the destruction of the world economy, Weitzman says that it is worse than useless to robotically assign a numerical value to these losses, and then discount exponentially at whatever rate one decides is relevant.

As one might expect, the alarmists in the climate change debate have seized upon Weitzman’s results, because they can use him to knock out the standard models which cannot be tortured into supporting the aggressive emissions cuts that the alarmists favor. The excitable Joe Romm’s discussion of Weitzman illustrates this perfectly…

…Basically, Nordhaus shows that Weitzman’s formal result isn’t as general as one might have supposed. In other words, Weitzman did not prove that anytime one has “fat tails” in the distribution, that CBA breaks down.

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