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From the St. Petersburg paradox to the dismal theorem

Published online by Cambridge University Press:  08 May 2020

Susumu Cato Open the ORCID record for Susumu Cato [Opens in a new window]
Susumu Cato*
Affiliation:
Institute of Social Science, The University of Tokyo, Tokyo, Japan
*
*Corresponding author. E-mail: [email protected]
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Abstract

This paper aims to consider the meaning of the dismal theorem, as presented by Martin Weitzman [(2009) On modeling and interpreting the economics of catastrophic climate change. Review of Economics and Statistics91, 1–19]. The theorem states that a standard cost–benefit analysis breaks down if there is a possibility of catastrophes occurring. This result has a significant influence on debates regarding the economics of climate change. In this study, we present an intuitive similarity between the dismal theorem and the St. Petersburg paradox using a simple discrete probability distribution.

Keywords

climate changecatastrophefat-tailed distributionuncertainty

JEL classification

D63: Equity, Justice, Inequality, and Other Normative Criteria and Measurement Q54: Climate • Natural Disasters and Their Management • Global Warming D81: Criteria for Decision-Making under Risk and Uncertainty D61: Allocative Efficiency • Cost–Benefit Analysis
Type
Research Article
Information
Environment and Development Economics , Volume 25 , Issue 5 , October 2020 , pp. 423 - 432
Copyright
Copyright © The Author(s) 2020. Published by Cambridge University Press

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