Does Stochasticity matter? Dynamic Pigouvian Taxation in an Uncertain Environment
AbstractThe effects of discounting, stochasticity, non-linearities and maximum decay upon an optimal corrective tax are analyzed using stochastic dynamic optimization. Optimal corrective taxes are derived as explicit feedback control laws in the presence of both flow and stock externalities when the decay of aggregated pollution is subject to a general stochastic process. This represents an adaptive approach to regulation of the environment. The problem has been solved using a non-linear Hamilton-Jacobi-Bellman equation. The model applied is quite general in the state variable, accumulated pollution, and in the control variable, production. The objective function is to maximize expected social welfare defined as the sum of consumers’ and producers’ surplus adjusted for externalities. Social welfare is not assumed to be separable in production and accumulated pollution. The main result is that the optimal tax is more sensitive to discounting and non-linearities than to stochasticity.
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Bibliographic InfoPaper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2004/6.
Length: 20 pages
Date of creation: 01 Jun 2004
Date of revision:
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More information through EDIRC
Global warming; flow and stock externalities; dynamic corrective taxes; stochastic dynamic optimisation;
Find related papers by JEL classification:
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
- Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- Wirl, Franz, 1994. "Global warming and carbon taxes: Dynamic and strategic interactions between energy consumers and producers," Journal of Policy Modeling, Elsevier, vol. 16(6), pages 577-596, December.
- Chakravorty, Ujjayant & Roumasset, James & Tse, Kinping, 1997. "Endogenous Substitution among Energy Resources and Global Warming," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1201-34, December.
- Ulph, Alistair & Ulph, David, 1994. "The Optimal Time Path of a Carbon Tax," Oxford Economic Papers, Oxford University Press, vol. 46(0), pages 857-68, Supplemen.
- Jorgenson, Dale W. & Wilcoxen, Peter J., 1990. "Intertemporal general equilibrium modeling of U.S. environmental regulation," Journal of Policy Modeling, Elsevier, vol. 12(4), pages 715-744.
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