Inattention and pollution regulation policies

Giovanni Di Bartolomeo (), Enrico Saltari and Willi Semmler

No 130, CIMEO Working Paper Series from Centre for Investigation and Modelling of Experimental Observations (CIMEO)

Abstract: We study the problem of pollution control enacted by some policy of regulation and mitigation. The policymakers are subjected to a trade--off between welfare increasing economic activity and pollution effects from economic activity having a negative effect on current welfare. We hereby assume policymakers that are inattentive. They may respond imprecisely to the continuously available information since they have a limited information processing capacity or make decisions under limited information. Inattention is modeled by using Nonlinear Model Predictive Control. Specifically, our policymakers solve a dynamic decision problem with finite horizon that involves the repetitive solution of an optimal control problem at each sampling instant in a receding horizon fashion. A shorter horizon is interpreted as a measure of inattention. We find that inattention substantially affects the transition dynamics. It leads to quicker, but more costly, transitions. It also leads to an under-evaluation of the environmental costs that may accelerate climate change.

Date: 2017-01
New Economics Papers: this item is included in nep-env
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Persistent link: https://EconPapers.repec.org/RePEc:ter:wpaper:00130

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