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Optimal pollution management when discount rates are endogenous

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  • Six, M.
  • Wirl, F.

Abstract

This paper investigates the consequences of endogenous discounting related to a stock externality, like ‘global warming’. This topic is of interest, especially since the Stern report and the ensuing public and academic debate have made clear how crucial discounting is for evaluating anti-global warming measures. We investigate the consequences of the assumption that discounting is endogenous, more precisely, decreases as the damage increases, i.e., decision makers become more patient when facing the environmental damages following their high consumption levels. This avoids time inconsistency, a pitfall when using hyperbolic discounting. However, it can lead to quite different and sometimes counterintuitive behavior in comparison to standard exogenous discounting: an endogenous discount rate, albeit always smaller than the exogenous one, (i) can nevertheless imply high stationary damages; (ii) can lead to multiple steady states.

Suggested Citation

  • Six, M. & Wirl, F., 2015. "Optimal pollution management when discount rates are endogenous," Resource and Energy Economics, Elsevier, vol. 42(C), pages 53-70.
    • Handle: RePEc:eee:resene:v:42:y:2015:i:c:p:53-70
    DOI: 10.1016/j.reseneeco.2015.06.002
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    More about this item

    Keywords

    Endogenous discounting; Impatience; Global warming; Multiple equilibria;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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