How much should we pay to prevent the tiny probability of human civilization collapsing? That is the question at the center of an esoteric debate over the application of cost-benefit analysis to man-made climate change. Harvard University economist Martin Weitzman raised the issue by putting forth a Dismal Theorem arguing that some consequences, however unlikely, would be so disastrous that cost-benefit analysis should not apply. Then again, perhaps Weitzman is premature in declaring the death of cost-benefit analysis. Yale University economist William Nordhaus certainly thinks so and has written a persuasive critique of Weitzman’s dismal conclusions. Nordhaus notes that Weitzman assumes that societies are so risk averse that they would be willing to spend unlimited amounts of money to avert the infinitesimal probability that civilization will be destroyed. Nordhaus then shows that Weitzman’s dismal theorem implies that the world would be willing to spend $10 trillion to prevent a one-in-100 billion chance of being hit by an asteroid. But people do not spend such vast sums in order to avoid low probability catastrophic risks. For example, humanity spends perhaps $4 million annually to find and track possibly dangerous asteroids.
