100 Economics Question of the Day: An Intermittent Blog: September 2008

Sunday, September 14, 2008

IF values must be GE 0, how do we account for extinctions?

Economists tend to assume an ordered set of preferences, and holdings in all securities /commodities to reflect that.

To make the math work, the standard assumption is that the holdings are >=0. This includes the assumptions of Arrow-Debreu, which is the model usually used to bash Stern supporters.

That is, in most cases, you hold zero of a specific stock or commodity by choice.

I live diving. I like coral reefs. If I read the Stern Report correctly—or even just heard Sir Nicholas's presentation at January's AEA meeting correctly—the coral reefs are not going to be around within 50 years.

The obvious conclusion is that someone placed a negative value on coral reefs.

But this contradicts the model, which requires x.GE.0.

So how do we explain extinction (a real phenomenon, and one not to be confused with "creative destruction") in economic modeling?

Labels: ,