Optimal Emission-Extraction Policy in a World of Scarcity and Irreversibility

Fabien Priuer, Mabel Tidball () and Cees Withagen
Authors registered in the RePEc Author Service: Fabien Prieur

No 77, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: This paper extends the classical exhaustible-resource/stock-pollution model with the irreversibility of pollution decay. Within this framework, we answer the question how the potential irreversibility of pollution affects the extraction path. We investigate the conditions under which the economy will optimally adopt a reversible policy, and when it is optimal to enter the irreversible region. In the case of irreversibility it may be optimal to leave a positive amount of resource in the ground forever. As far the optimal extraction/emission policy is concerned, several types of solutions may arise, including solutions where the economy stays at the threshold for a while.Given that different programs may satisfy the first order conditions for optimality, we further investigate when each of these is optimal. The analysis is illustrated by means of a numerical example. To sum up, for any pollution level, we can identify a critical resource stock such that there exist multiple optima i.e. a reversible and an irreversible policy that yield exactly the same present value. For any resource stock below this critical value, the optimal policy is reversible whereas with large enough resource, irreversible policies outperform reversible programs. Finally, the comparison between irreversible policies reveals that it is never optimal for the economy to stay at the threshold for a while before entering the irreversible region.

Keywords: non-renewable resource; irreversible pollution; optimal policy (search for similar items in EconPapers)
JEL-codes: C61 Q30 Q53 (search for similar items in EconPapers)
Date: 2011-12-13
New Economics Papers: this item is included in nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Related works:
Journal Article: Optimal emission-extraction policy in a world of scarcity and irreversibility (2013)
Working Paper: Optimal Emission-Extraction Policy in a World of Scarcity and Irreversibility (2011)
Working Paper: Optimal emission-extraction policy in a world of scarcity and irreversibility (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:oxf:oxcrwp:077

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