Monday, July 25, 2005

Global Warming and The Endowment Effect

I’ve been trying to get together a piece on rent-seeking aspects of Kyoto and subsequent global warming policies, but I’ve gotten sidetracked by a number of things. I am on holidays, after all. But one thing I’ve come across is the notion that there is a fair bit of evidence that the benefits of global warming may actually exceed the costs.

Directly leaving that issue aside for the moment, I’m wondering whether the benefits and costs can really be directly compared this way. A fairly large volume of economic research has indicated that people’s willingness-to-pay (demand) curves are very rarely straight lines, and they typically have kinks at the status quo situation. In other words, researchers such as 2002 Nobel Prize winner Daniel Kahneman and Jack Knetsch (a professor emeritus at The School of Resource and Environmental Management at Simon Fraser University, where I went to grad school) have found that people are generally much more resistant to giving up what they have then they are interested in obtaining more (this is known as “the endowment effect”). This is presumably due to the psychological effects of reference dependence and risk aversion. With this in mind, I wonder if we need to place more value on the losses that certain regions/individuals will incur because of global warming than we put on the benefits that may also result because of warming (that is, if the comparisons that are currently available are ignoring this effect, which I assume they are). Regardless, it may be important to have some mechanisms in place to compensate those who are net “losers” from global warming, as the costs and benefits are clearly unequally distributed.


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