Resource Depletion and Capital Accumulation under Catastrophic Risk: Policy Actions against Stochastic Thresholds and Stock Pollution

Eric Nævdal and Jon Vislie

No 24/2013, 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 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 (search for similar items in EconPapers)
JEL-codes: C61 Q51 Q54 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2013-11-04
New Economics Papers: this item is included in nep-cba and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:osloec:2013_024

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