Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/90718
Authors: 
Nævdal, Eric
Vislie, Jon
Year of Publication: 
2013
Series/Report no.: 
Memorandum, Department of Economics, University of Oslo 24/2013
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 randomdisembodied 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.
Subjects: 
Catastrophic risk
stochastic threshold
optimal saving
JEL: 
C61
Q51
Q54
Document Type: 
Working Paper

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