Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/53417 
Year of Publication: 
2011
Series/Report no.: 
Nota di Lavoro No. 18.2011
Publisher: 
Fondazione Eni Enrico Mattei (FEEM), Milano
Abstract: 
The precautionary principle (PP) applied to environmental policy stipulates that, in the presence of physical uncertainty, society must take robust preventive action to guard against worst-case outcomes. It follows that the higher the degree of uncertainty, the more aggressive this preventive action should be. This normative maxim is explored in the case of a stylized dynamic model of pollution control under Knightian uncertainty. At time 0 a decision-maker makes a one-time investment in damage-control technology and subsequently decides on a desirable dynamic emissions policy. Adopting the robust control framework of Hansen and Sargent [10], we investigate optimal damage-control and mitigation policies. We show that optimal investment in damage control is always increasing in the degree of uncertainty, thus confirming the conventional PP wisdom. Optimal mitigation decisions, however, need not always comport with the PP and we provide analytical conditions that sway the relationship one way or the other. This result is interesting when contrasted to a model with fixed damage-control technology, in which it can be easily shown that a PP vis-a-vis mitigation unambiguously holds. We conduct a set of numerical experiments to determine the sensitivity of our results to specific functional forms of damage-control cost. We find that when the cost of damage-control technology is low enough, damage-control investment and mitigation may act as substitutes and a PP with respect to the latter can be unambiguously irrational.
Subjects: 
Risk
Ambiguity
Robust Control
Precautionary Principle
Pollution Control
JEL: 
C61
D80
D81
Document Type: 
Working Paper

Files in This Item:
File
Size
504.96 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.