Adopting Tolerance Regions in Environmental Economics

Abstract

Uncertainty often lies when there is limited knowledge about the process one has to follow regarding the investigation of a real-world problem. In practice, uncertainty is related with the assumed estimation model of the physical problem, and mainly concerns the involved parameters. A typical example can be an Environmental Economics system. There are many model specifications that estimate the so-called Benefit Area of such system. For the evaluation of the optimal level of pollution, we can adopt the corresponding tolerance region, and hence we can refer to this optimal level via future observations rather than some parameters estimation. Tolerance regions can be either classical or expected tolerance regions. The associated (four) Benefit Areas can be evaluated through a proposed tolerance region procedure, and not through the usual confidence interval/region approach. Therefore, four possible optimal levels of pollution can be obtained, as well as the corresponding tolerance region for the reduction pollution point.