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

JEL-codes: C61; Q51; Q54

31 pages, September 7, 2012

Full text files

memo-24-2012.pdf PDF-file 

Download statistics

Questions (including download problems) about the papers in this series should be directed to Mari Strønstad Øverås ()
Report other problems with accessing this service to Sune Karlsson ().

This page generated on 2024-02-05 17:13:11.