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Resource Depletion and Capital Accumulation under Catastrophic Risk: Policy Actions against Stochastic Thresholds and Stock Pollution

  • Nævdal, Eric

    (Ragnar Frisch Centre for Economic Research)

  • Vislie, Jon


    (Dept. of Economics, University of Oslo)

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 an optimal strategy by imposing the notion “precautionary tax” on current extraction for preventing a productivity shock driven by stock pollution and a capital subsidy to promote capital accumulation so as to build up a buffer for future consumption opportunities should the threshold be hit. The precautionary tax will internalize the expected welfare loss should a threshold be hit, whereas the capital subsidy will internalize the expected post-catastrophic long-run return from current capital accumulation.

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Paper provided by Oslo University, Department of Economics in its series Memorandum with number 24/2013.

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Length: 32 pages
Date of creation: 04 Nov 2013
Date of revision:
Handle: RePEc:hhs:osloec:2013_024
Contact details of provider: 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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  8. Weitzman, Martin L., 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," Scholarly Articles 3693423, Harvard University Department of Economics.
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  23. Martin L. Weitzman, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 703-724, September.
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  26. Clarke, Harry R. & Reed, William J., 1994. "Consumption/pollution tradeoffs in an environment vulnerable to pollution-related catastrophic collapse," Journal of Economic Dynamics and Control, Elsevier, vol. 18(5), pages 991-1010, September.
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