Scandinavian Working Papers in Economics
Memorandum,
Oslo University, Department of Economics
No 24/2012: Resource Depletion and Capital Accumulation under Catastrophic Risk: The Role of Stochastic Thresholds and Stock Pollution
Erik Nævdal () and Jon Vislie ()
Additional contact information
Erik Nævdal: The Frisch Centre for EConomic Research, Postal: Gaustadalléen 21 , N-0349 Oslo , Norway
Jon Vislie: Dept. of Economics, University of Oslo, Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Abstract: 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 the optimal strategy by imposing the notion “precautionary tax” on current extraction. Such a tax will internalize future expected damages or expected welfare loss should a threshold be hit. With reversible capital the presence of a stochastic threshold should speed up accumulation as long as no threshold is hit so as to build up a buffer or stock for future consumption should a threshold be hit.
Keywords: Catastrophic risk and stochastic thresholds; capital accumulation; precautionary taxation; stock pollution; resource extraction
31 pages, September 7, 2012
Full text files
memo-24-2012.pdf
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