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Pollution Control with Time-Varying Model Mistrust of the Stock Dynamics

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  • Fidel Gonzalez

    (Sam Houston State University)

Abstract

I develop a framework to analyze the robust emissions tax policy for a stock pollutant when the environmental authority is not fully confident about its estimated model of pollution dynamics and, in contrast to previous research, the degree of model mistrust may change over time. I characterize the effect of time-varying model mistrust on emission taxes, pollution stocks and welfare. The general results of this paper show that introducing the possibility of a time-varying degree of model mistrust produces different emission taxes, abatement and welfare compared to the traditional assumption of a time-fixed model mistrust. This result holds even if the probability that the model mistrust may change in the future is small. If the environmental authority expects that the model uncertainty may decrease in the future then current emissions taxes should also decrease. Conversely, if the model mistrust may increase in the future then an active approach compatible with the Precautionary Principle is optimal and current emissions taxes should also increase.

Suggested Citation

  • Fidel Gonzalez, 2018. "Pollution Control with Time-Varying Model Mistrust of the Stock Dynamics," Computational Economics, Springer;Society for Computational Economics, vol. 51(3), pages 541-569, March.
    • Handle: RePEc:kap:compec:v:51:y:2018:i:3:d:10.1007_s10614-016-9622-z
    DOI: 10.1007/s10614-016-9622-z
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    More about this item

    Keywords

    Robust control; Markov chain; Knightian uncertainty; Stock dynamics; Pollution control;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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