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Double Irreversibility and Environmental Policy Timing




The timing of environmental policy typically takes place within a framework in which uncertainty over the future impact of pollution and two different kinds of irreversibilities interact. The first kind of irreversibility concerns the sunk cost of environmental degradation; the second is related to the sunk cost of environmental policy. Clearly, the two irreversibilities pull in opposite directions: policy irreversibility leads to more pollution and a less/later policy, while environmental irreversibility generates less pollution and a more/sooner policy. Using a real option approach and an infinite time horizon model, this paper considers both irreversibilities simultaneously. The model first is developed by paying particular attention to the option values related to pollution and policy adoption. The environmental policy we consider consists in increasing the natural assimilation rate. Solving the model in closed form then provides solutions for both the optimal pollution level and the optimal environmental policy timing. Finally, we provide a numerical example with the purpose of appraising which irreversibility has the prevailing effect and what is the overall impact of both irreversibilities on pollution and policy timing.
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Suggested Citation

  • Aude Pommeret & Fabien Prieur, 2013. "Double Irreversibility and Environmental Policy Timing," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 15(2), pages 273-291, April.
  • Handle: RePEc:bla:jpbect:v:15:y:2013:i:2:p:273-291
    DOI: jpet.12018

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    Cited by:

    1. Giorgio Ferrari & Torben Koch, 2019. "On a strategic model of pollution control," Annals of Operations Research, Springer, vol. 275(2), pages 297-319, April.
    2. Ferrari, Giorgio & Koch, Torben, 2018. "On a Strategic Model of Pollution Control," Center for Mathematical Economics Working Papers 586, Center for Mathematical Economics, Bielefeld University.
    3. Alberto Ansuategi & Simone Marsiglio, 2017. "Is Environmental Protection Beneficial for the Environment?," Review of Development Economics, Wiley Blackwell, vol. 21(3), pages 786-802, August.

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