Inattention and pollution regulation policies
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.
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