Consistent dynamic choice, non-renewable resource use, and uncertainty

Abstract

The principles which guide non-renewable resource use are based partly on theoretical investigations of the consequences and the merits of use, which are both uncertain. Existing economic approaches to uncertainty do not correctly reflect a decision-maker's position in time. The power to determine future decisions is overstated, and a limited range of objectives can be investigated.

These problems are addressed by developing a new approach to choice over long time periods. The approach is recursive: each of a sequence of decision-makers decides on the immediate action to take, given the expected consequences, among which are the future actions. Each decision-maker forecasts how future decisions will be made by forecasting what the future decision-makers' objectives and options will be. The resulting forecast actions are consistent: there is no foreseen reason why they will later need revision.

Virtually any sequence of objectives can be investigated with the approach. Applying it to non-renewable resource use over three periods reveals that the optimal initial use: changes if future decision-makers use discount rates different from the first; changes if the future discount rates become uncertain; changes with a change in the time at which future technological improvements become known.