Welfare measurement under threats of environmental catastrophes

Welfare measures under threats of environmental catastrophes are studied using the “parable” apparatus of Weitzman and Löfgren [On the welfare significance of green accounting as taught by parable, J. Environ. Econ. Manage. 32 (1997) 139–153]. The occurrence probability of the catastrophic events is driven (at least partly) by anthropogenic activities such as natural resource exploitation. Without external effects, the green NNP is a genuine welfare measure vis-à-vis a particular parable economy. Often, however, the occurrence hazard constitutes a public bad, treated as an externality by agents who ignore their own contribution to its accumulation. In such cases the green NNP, although accounting for the event hazard rate per se, fails to properly internalize future effects on the hazard rate of current economic activities and as a result overestimates welfare. The bias term associated with the green NNP is derived and expressed in a simple and interpretable form.