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Resource Depletion and Capital Accumulation under Catastrophic Risk: The Role of Stochastic Thresholds and Stock Pollution

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  • Nævdal, Erik

    ()
    (The Frisch Centre for EConomic Research)

  • Vislie, Jon

    ()
    (Dept. of Economics, University of Oslo)

Abstract

An intertemporal optimal strategy for accumulation of reversible capital and management of an exhaustible resource is analyzed for a global economy when resource depletion generates discharges that add to a stock pollutant that affects the likelihood for hitting a tipping point or threshold of unknown location, causing a random“disembodied technical regress”. We characterize the optimal strategy by imposing the notion “precautionary tax” on current extraction. Such a tax will internalize future expected damages or expected welfare loss should a threshold be hit. With reversible capital the presence of a stochastic threshold should speed up accumulation as long as no threshold is hit so as to build up a buffer or stock for future consumption should a threshold be hit.

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File URL: https://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2012/memo-24-2012.pdf
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Bibliographic Info

Paper provided by Oslo University, Department of Economics in its series Memorandum with number 24/2012.

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Length: 31 pages
Date of creation: 07 Sep 2012
Date of revision:
Handle: RePEc:hhs:osloec:2012_024

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Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Phone: 22 85 51 27
Fax: 22 85 50 35
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Web page: http://www.oekonomi.uio.no/indexe.html
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Related research

Keywords: Catastrophic risk and stochastic thresholds; capital accumulation; precautionary taxation; stock pollution; resource extraction;

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References

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  19. Kamien, Morton I & Schwartz, Nancy L, 1978. "Optimal Exhaustible Resource Depletion with Endogenous Technical Change," Review of Economic Studies, Wiley Blackwell, vol. 45(1), pages 179-96, February.
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  22. Asbjørn Torvanger, 1997. "Uncertain climate change in an intergenerational planning model," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 9(1), pages 103-124, January.
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