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Precaution under mixed uncertainty: Implications for environmental management

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  • Zemel, Amos
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    Abstract

    A model of pollution control subject to two types of uncertainty is presented. First, the natural decay of the pollution stock follows stochastic dynamics that drives a diffusion pollution process (“stochastic uncertainty”). Moreover, the damage coefficient which determines the amount of damage corresponding to each pollution stock can undergo an abrupt increase at some uncertain future time (“event uncertainty”). The model admits an explicit and simple dynamic characterization of the optimal emission rule and the ensuing pollution process. When only one type of uncertainty is permitted (by setting either the variance of the stochastic process or the hazard rate for the damage increase to zero) it acts to promote the intuitive response of precaution. However, allowing the two types to interact gives rise to a non-monotonic behavior, whereby increasing the stochastic variance first enhances, then diminishes the response to the hazard. The results confirm and expand recent findings based on discrete-time formulations.

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    Bibliographic Info

    Article provided by Elsevier in its journal Resource and Energy Economics.

    Volume (Year): 34 (2012)
    Issue (Month): 2 ()
    Pages: 188-197

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    Handle: RePEc:eee:resene:v:34:y:2012:i:2:p:188-197

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    Web page: http://www.elsevier.com/locate/inca/505569

    Related research

    Keywords: Stochastic control; Environmental pollution; Uncertainty; Optimal management; Regime shifts;

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    References

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    1. Naevdal, Eric, 2006. "Dynamic optimisation in the presence of threshold effects when the location of the threshold is uncertain - with an application to a possible disintegration of the Western Antarctic Ice Sheet," Journal of Economic Dynamics and Control, Elsevier, vol. 30(7), pages 1131-1158, July.
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    Cited by:
    1. Michele Baggio, 2012. "The Optimal Management of a Natural Resource with Switching Dynamics," IED Working paper 12-19, IED Institute for Environmental Decisions, ETH Zurich.
    2. Frederick van der Ploeg, 2012. "Resource Wars and Confiscation Risk," OxCarre Working Papers 097, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    3. Tsur, Yacov & Zemel, Amos, 2012. "Dynamic and stochastic analysis of environmental and natural resources," Discussion Papers 120017, Hebrew University of Jerusalem, Department of Agricultural Economics and Management.

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