Scandinavian Working Papers in Economics
Memorandum,
Oslo University, Department of Economics
No 24/2013: Resource Depletion and Capital Accumulation under Catastrophic Risk: Policy Actions against Stochastic Thresholds and Stock Pollution
Eric Nævdal and Jon Vislie ()
Additional contact information
Eric Nævdal: Ragnar Frisch Centre for Economic Research, Postal: Ragnar Frisch Centre for Economic Research, Gaustadalléen 21, NO-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 an optimal strategy by imposing the notion “precautionary tax” on current extraction for preventing a productivity shock driven by stock pollution and a capital subsidy to promote capital accumulation so as to build up a buffer for future consumption opportunities should the threshold be hit. The precautionary tax will internalize the expected welfare loss should a threshold be hit, whereas the capital subsidy will internalize the expected post-catastrophic long-run return from current capital accumulation.
Keywords: Catastrophic; risk; stochastic; threshold; optimal; saving
32 pages, November 4, 2013
Full text files
memo-24-2013.pdf
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