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Academic Commons Search Resultsen-usInternational Emission Permits: Equity and Efficiency
https://academiccommons.columbia.edu/catalog/ac:99991
Chichilnisky, Graciela; Heal, Geoffrey M.; Starrett, Davidhttp://hdl.handle.net/10022/AC:P:15578Mon, 28 Feb 2011 09:37:33 +0000Not all possible distributions of a given total of emission permits are compatible with the attainment of first-best Pareto efficiency. In fact, of the infinitely many ways of distributing a given total of permits between a fixed number of parties, only a finite number can lead to efficiency. We can therefore evaluate permit allocations not only in terms of their equity, but also in terms of their efficiency. If there are no other redistributive instruments in the policy environment, the traditional orthogonality of equity and efficiency does not hold here. This has important implications for arguments about the initial international distribution of entitlements to produce carbon dioxide.Economicsgc9, gmh1Economics, Business, Earth Institute, International and Public AffairsWorking papersWho should abate carbon emission?
https://academiccommons.columbia.edu/catalog/ac:99982
Chichilnisky, Graciela; Heal, Geoffrey M.http://hdl.handle.net/10022/AC:P:15575Fri, 25 Feb 2011 09:43:47 +0000We review the optimal pattern of carbon emission abatements across countries in a simple multi-country world. We model explicitly (with the model in Chichilnisky [4]) the fact that the atmosphere is a public good. Within this framework we establish conditions for it to be necessary for optimality that the marginal cost of abatement be the same in all countries. These condition are quite restrictive, and amount to either ignoring distributional issues between countries or operating within a framework within which lump-sum transfers can be made between countries. These results have implications for the use of tradeable emission permits, which as normally advocated will lead to the equalization of marginal abatement costs across countries. The observation that the atmosphere is a public good implies that we may need to look at a Lindahl equilibrium in tradeable permits.Economicsgc9, gmh1Economics, Business, Earth Institute, International and Public AffairsWorking papersGlobal Environmental Risks
https://academiccommons.columbia.edu/catalog/ac:134798
Chichilnisky, Graciela; Heal, Geoffrey M.http://hdl.handle.net/10022/AC:P:15536Thu, 24 Feb 2011 12:35:34 +0000We study the risks associated with the prospect of global climate change, and review the mechanisms available for their efficient allocation in market economies. Risks in this field are typically unknown and often unknowable ex ante; their probabilities are endogenous and determined by economic actions; they have both collective and individual components, and they are about processes that may be irreversible. The theory of how to allocate such risks is still being developed, but a certain amount is known about insurance with unknown risks and about uncertainty and irreversibility. We indicate what is known and set out its policy implications, and provide a challenging but realistic research agenda. We show that existing theories provide a framework for evaluating policies for mitigating global climate change. How much a society should pay to mitigate global change depends on a society's discount rate, degree of risk aversion, and assessment of the relevant probabilities. As these may differ from society to society, what societies are willing to pay will vary. These differences may provide a basis for international trade in global climate risks. We argue that there is a real value to international institutional arrangements and financial markets that encourage countries to back words by deeds by making them liable to buy and sell risks associated with global climate change at the prices that their economic policies implicitly put on these risks.Economics, Climate changegc9, gmh1Economics, Business, Earth Institute, International and Public AffairsWorking papersPrice Uncertainty and Derivative Securities in a General Equilibrium Model
https://academiccommons.columbia.edu/catalog/ac:99851
Chichilnisky, Graciela; Dutta, Jayasri ; Heal, Geoffrey M.http://hdl.handle.net/10022/AC:P:15534Thu, 17 Feb 2011 12:12:43 +0000Consider an exchange economy with multiple competitive equilibria. Agents know the set of equilibria, but not which will be selected. To insure against unfavorable equilibrium outcomes, they trade on markets for commodities contingent on the equilibrium price vector. Such price-contingent contracts allow agents to insure fully against the risk stemming from uncertainty about the equilibrium to be chosen. However they introduce further uncertainty because there may be several possible equilibrium prices for price-index-contingent commodities. The introduction of higher-order of derivative products removes this uncertainty, but in turn introduces uncertainty about the prices of these products. We prove that in regular economies this process converges in a finite number of steps to a unique fully-insured Pareto efficient allocation. The introduction of price-contingent commodities or securities and further derivative securities removes all endogenous uncertainty associated with lack of knowledge of equilibrium prices. We thus provide a mechanism for resolving non-uniqueness in economies with multiple equilibria and also give an important resource-allocation role to derivative securities based on price indices.Economicsgc9, gmh1Economics, Business, Earth Institute, International and Public AffairsWorking papersOption and Non-Use Values of Environmental Assets
https://academiccommons.columbia.edu/catalog/ac:99778
Chichilnisky, Graciela; Beltratti, Andrea; Heal, Geoffrey M.http://hdl.handle.net/10022/AC:P:15511Thu, 17 Feb 2011 11:38:44 +0000It is widely recognized that the value of environmental assets such as biodiversity, unique locations and the atmosphere may be hard to quantify. In particular, option values, quasi-option values and non-use values have been the subject of extensive discussion. We propose here an evaluation of environmental assets based on the option value or shadow price associated with intertemporal welfare maximization under conditions of uncertainty about the future preferences. We show that these values can provide powerful motives for conservation of the goods, and are under certain conditions equivalent to a reduction in the discount rate to be applied to future benefits. We also show that the option value can be bounded below by a function of the degree of risk aversion and parameters of the probability distribution governing the uncertainty about future preferences.Economicsgc9, gmh1Economics, Business, Earth Institute, International and Public AffairsWorking papersBelieving in Multiple Equilibria
https://academiccommons.columbia.edu/catalog/ac:99985
Chichilnisky, Graciela; Heal, Geoffrey M.; Streufert, Peter A.; Swinkels, Jeroen M.http://hdl.handle.net/10022/AC:P:15576Thu, 17 Feb 2011 11:06:52 +0000If agents have common priors concerning the probability with which equilibrium is selected, they have an incentive to trade beforehand. If their trading process satisfies a certain notion of individual rationality, these trades will reduce and ultimately remove all uncertainty concerning equilibrium selection. In this sense, multiple equilibria engender institutions which can uniquely determine equilibrium.Economicsgc9, gmh1Economics, Business, Earth Institute, International and Public AffairsWorking papersFinancial Markets for Unknown Risks
https://academiccommons.columbia.edu/catalog/ac:99848
Chichilnisky, Graciela; Heal, Geoffrey M.http://hdl.handle.net/10022/AC:P:15533Thu, 17 Feb 2011 11:04:22 +0000An economy faces an unknown individual risk, such as the health effects of recently discovered environmental hazard. Opinions may be widely different about the distribution of risks across the population. We study financial markets that suffice to reach efficient allocations in this situation. The problem is formalized in a general equilibrium economy with incomplete markets for individual and collective uncertainty. We show that ignorance of the probabilities describing individual risk leads to collective risk. Introducing an array of mutual insurance policies and of Arrow securities is shown to lead to Arrow-Debreu competitive allocations. By combining insurance contracts for individual risks and securities markets for collective risks, the proposed institutional framework economizes significantly on the number of markets required for efficiency. The computational complexity of a market equilibrium is reduced from an NP-complete (i.e. intractable) problem to one which depends polynomially on the number of households.Economicsgc9, gmh1Economics, Business, Earth Institute, International and Public AffairsWorking papersFinancial Markets for Unknown Risks
https://academiccommons.columbia.edu/catalog/ac:99764
Chichilnisky, Graciela; Heal, Geoffrey M.http://hdl.handle.net/10022/AC:P:15507Thu, 17 Feb 2011 10:54:12 +0000An economy faces an unknown individual risk, such as the health effects of a recently discovered environmental hazard. Opinions may be widely different about the distribution of risks across the population. We study financial markets that suffice to reach efficient allocations in this situation. The problem is formalized in a general equilibrium economy with incomplete markets for individual and collective uncertainty. We show that ignorance of the probabilities describing individual risk leads to collective risk. Introducing an array of mutual insurance policies and of Arrow securities is shown to lead to Arrow-Debreu competitive allocations. By combining insurance contracts for individual risks and securities markets for collective risks, the proposed institutional framework economizes significantly on the number of markets required for efficiency. The computational complexity of a market equilibrium is reduced from an NP - complete (i.e. intractable) problem to one which depends polynomially on the number of households.Economicsgc9, gmh1Economics, Business, Earth Institute, International and Public AffairsWorking papersArbitrage and Equilibrium in Economies with Infinitely Many Securities and Commodities
https://academiccommons.columbia.edu/catalog/ac:99770
Chichilnisky, Graciela; Heal, Geoffrey M.http://hdl.handle.net/10022/AC:P:15509Thu, 17 Feb 2011 10:17:58 +0000Welfare economics and finance have each evolved their own equilibrium concepts. In
welfare economics this is the concept of a competitive general equilibrium: in finance, it is the
absence of arbitrage opportunities. These concepts emerged independently and were initially
seen as quite distinct. Each plays an absolutely central role in its field, both in the theory and
in practical applications. In the 1980s researchers in both fields began to investigate the
connections between the two concepts.Economicsgc9, gmh1Economics, Business, Earth Institute, International and Public AffairsWorking papersRobustly Efficient Equilibria in Non-Convex Economies
https://academiccommons.columbia.edu/catalog/ac:99845
Chichilnisky, Graciela; Heal, Geoffrey M.http://hdl.handle.net/10022/AC:P:15532Thu, 17 Feb 2011 10:05:46 +0000An economy has a robustly efficient marginal cost pricing equilibrium (mcpe) if it has an mcpe that is Pareto efficient and if this property is preserved under small variations in preferences endowments and technologies. We consider economies in which there is a finite number of equilibria, each of which varies continuously with preferences and endowments. We prove that there exist no robustly efficient marginal cost pricing equilibria.Economicsgc9, gmh1Economics, Business, Earth Institute, International and Public AffairsWorking papers