maandag 3 februari 2014

Scenario issues: scenarios versus policies

I usually emphasize in my lectures that you should strictly distinguish policies from scenarios. Policies are what we choose; scenarios simply describe what might happen, regardless of what we choose. In practice it is not as clear-cut as that may seem.

Look at it like this. Suppose we have two policy options. To choose the right policy we also need to know how each policy plays out in the future. But there we have a problem: we don't know what the future will look like. Usually, however, we do have a rough idea of developments that may take place. We could take some of those developments and explore how they might combine. By doing this we develop a number of scenarios that illustrate what the future could look like (not what it will look like). We can then evaluate our policy options in each scenario. For example, with two policy options and two scenarios we could make a table like this:

Scenario 1Scenario 2
Policy 1You win $100You lose $100
Policy 2You lose $50You win $80

In any environmental economics textbook you will find different possible rules to choose between policy options under such uncertainty. Perhaps you want to minimize the possible losses from your policy. By such a maximin rule, as it is called, you would ignore the best outcomes and focus on the worst ones. So you choose Policy 2 because the worst that could happen under Policy 2 is that you lose $50 where under Policy 1 you could lose $100. It is also possible that you want to get as much as possible out of your policy. By following a maximax rule, where you ignore the worst outcomes and focus on the best ones, you would go for Policy 1. After all, Policy 1 could yield $100 where Policy 2 can, at best, yield only $80. And there are more decision rules.

Every year I see students, when asked exam questions like the problem above, give answers like "I would choose Scenario 1". Which is why I keep emphasizing: you don't choose scenarios. Nature chooses the scenario. Or God, or Fate, whatever you want to call it. But not the policy maker.

But now comes the tricky part. Suppose the policy maker cannot choose all possible policies at once. Perhaps she works at some government department that decides on some policies, but there are other policies that are decided by other departments. Or the effect of her policies depend on what other governments do.

We're having discussions about this all the time in VECTORS. For example, an Environment Ministry might want to evaluate a ballast water treatment policy to combat invasive species, but the effects of the policy also depend on international trade policies which are decided by the Ministry of Economic Affairs, or even other countries' policies. The trade policy might then become part of the scenarios as far as the Environment Ministry is concerned. This is very confusing, and I notice that a lot of people are uncomfortable with including policies as part of scenarios. It seems to me that they prefer their scenarios as pure, roll-the-dice, chance events. Their objection to including policies in scenarios is that, eventually, people decide on policies. They are not chance events. My reply would be that we can only decide on a particular domain, like ballast water treatment policy, or fisheries policy, or MPA allocation. What happens outside that domain is something we cannot influence, so it has to be considered a chance event. But I agree it feels uncomfortable, and the line is difficult to draw.

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