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Living on the Edge of the Catastrophe

Author

Listed:
  • Andrea Rampa

    () (Dipartimento di Economia Diritto e Istituzioni. University of Tor Vergata, Italy.)

  • Alessio D'Amato

    () (Deptartment of Economics and Management. University of Tor Vergata, Italy.)

Abstract

The aim of this paper is to provide a theoretical model in order to analyse environmental policy under uncertainty regarding the possibility of a natural disaster. We adopt a two-periods analytical model, to investigate two different institutional settings, one featuring a myopic social planner, choosing emissions in each time period to maximize current net bene?ts, and one featuring a forward-looking planner, who maximizes the expected net present value of welfare across the two periods. As in Barrett (2013), uncertainty regards a threshold pollution level that, if violated, triggers a natural disaster. We conclude that under a myopic social planner welfare may increase or decrease over time, while in a non-myopic scenario welfare always increases across periods. Also, our model supports the idea that a myopic social planner pushes emissions closer to the edge of the natural disaster, but then, if the latter does not take place in the ?rst period, bene?ts from having done that in terms of welfare in the second period. Introducing a stochastic decay rate, we also show that the environment may reward (punish) myopic behaviour ex post. Finally, the comparison between myopic and forward looking settings is not straightforward: this depends on a risk spreading vs. information learning trade off.

Suggested Citation

  • Andrea Rampa & Alessio D'Amato, 2015. "Living on the Edge of the Catastrophe," SEEDS Working Papers 0315, SEEDS, Sustainability Environmental Economics and Dynamics Studies, revised Feb 2015.
  • Handle: RePEc:srt:wpaper:0315
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    References listed on IDEAS

    as
    1. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
    2. Newell, Richard G. & Pizer, William A., 2003. "Regulating stock externalities under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 416-432, March.
    3. Stavins, Robert N., 1996. "Correlated Uncertainty and Policy Instrument Choice," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 218-232, March.
    4. Costello, Christopher & Karp, Larry, 2004. "Dynamic taxes and quotas with learning," Journal of Economic Dynamics and Control, Elsevier, vol. 28(8), pages 1661-1680, June.
    5. Barrett, Scott, 2013. "Climate treaties and approaching catastrophes," Journal of Environmental Economics and Management, Elsevier, vol. 66(2), pages 235-250.
    6. Tarui, Nori & Polasky, Stephen, 2005. "Environmental regulation with technology adoption, learning and strategic behavior," Journal of Environmental Economics and Management, Elsevier, vol. 50(3), pages 447-467, November.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Catastrophe; Uncertainty; Environmental Policy; Risk; Natural Disaster;

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)

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