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Inattention and pollution regulation policies

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  • Di Bartolomeo Giovanni
  • Saltari Enrico
  • Semmler Willi

Abstract

We study the problem of pollution control enacted by some policy of regulation and mitigation. The policymakers are subjected to a trade--off between welfare increasing economic activity and pollution effects from economic activity having a negative effect on current welfare. We hereby assume policymakers that are inattentive. They may respond imprecisely to the continuously available information since they have a limited information processing capacity or make decisions under limited information. Inattention is modeled by using Nonlinear Model Predictive Control. Specifically, our policymakers solve a dynamic decision problem with finite horizon that involves the repetitive solution of an optimal control problem at each sampling instant in a receding horizon fashion. A shorter horizon is interpreted as a measure of inattention. We find that inattention substantially affects the transition dynamics. It leads to quicker, but more costly, transitions. It also leads to an under-evaluation of the environmental costs that may accelerate climate change.

Suggested Citation

  • Di Bartolomeo Giovanni & Saltari Enrico & Semmler Willi, 2017. "Inattention and pollution regulation policies," wp.comunite 00130, Department of Communication, University of Teramo.
  • Handle: RePEc:ter:wpaper:00130
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    References listed on IDEAS

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    12. Grüne, Lars & Semmler, Willi & Stieler, Marleen, 2015. "Using nonlinear model predictive control for dynamic decision problems in economics," Journal of Economic Dynamics and Control, Elsevier, vol. 60(C), pages 112-133.
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    14. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
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    16. Dockner Engelbert J. & Van Long Ngo, 1993. "International Pollution Control: Cooperative versus Noncooperative Strategies," Journal of Environmental Economics and Management, Elsevier, vol. 25(1), pages 13-29, July.
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