Optimal Extractive Taxes Under Demand Uncertainty

James Fain () and Mary N. Gade
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Mary N. Gade: Oklahoma State University

Public Finance Review, 1992, vol. 20, issue 2, 243-255

Abstract: The authors develop a two-period duopoly model characterized by demand uncer- Abstract tainty to consider how a state government should tax the extraction of a nonrenewable resource. They demonstrate that if firms are risk averse, they tilt production toward the future and underproduce in the present even more than they would in a world of perfect certainty. Therefore, states should set extractive per-unit taxes such that they increase over time at a rate faster than the interest rate to motivate an increase in production in the present relative to the future .

Date: 1992
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Persistent link: https://EconPapers.repec.org/RePEc:sae:pubfin:v:20:y:1992:i:2:p:243-255

DOI: 10.1177/109114219202000207

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