Resource Depletion and Capital Accumulation under Catastrophic Risk: The Role of Stochastic Thresholds and Stock Pollution

Eric Nævdal and Jon Vislie

No 24/2012, Memorandum from Oslo University, Department of Economics

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 (search for similar items in EconPapers)
JEL-codes: C61 Q51 Q54 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2012-09-07
New Economics Papers: this item is included in nep-ene, nep-env, nep-ore, nep-res and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:osloec:2012_024

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