Uncertainty in environmental economics: The problem of entropy and model choice

Abstract

In this paper the appropriate background in mathematics and statistics is considered in developing methods to investigate the uncertainty problem associated with environmental economics. A new generalized measure of uncertainty is introduced and a number of sources of uncertainty are discussed and presented. The causes of uncertainty are recognized and an examination is made of how they affect the adopted policies and how important their management is in any decision-making process, either under the introduced generalized normal distribution or the model choice. We show that mathematical models formulate the problem and statistical models offer possible solutions, restricting the underlying uncertainty, given the model and the error assumptions are correct. The mathematical approach can be adopted using environmental economics problems by paying attention to model choice uncertainty. As uncertainty is always present, we discuss both the model choice uncertainty and the generalized normal distribution uncertainty, through new entropy measures. © 2018 Economic Society of Australia, Queensland