(1) Escuela de Economia, Universidad de Guanajuato, Ucea-Campus Marfil, Fracc. 1, El Establo, Guanajuato, Gto, CP 36250, Mexico;(2) Department of Economics, University of Oslo, P.O. Box 1095, Blindern, 0317 Oslo, Norway
Abstract:
Safe Minimum Standards (SMSs) has been advocated as a policy rule for certain environmental problems where uncertainty about risks and consequences are thought to be profound. This paper explores the rationale for such a policy within both static and dynamic frameworks and derives conditions for when SMS can be summarily dismissed as a policy choice and for when SMS can be defended as an optimal policy based on standard economic criteria. It turns out that these conditions can be checked with quite limited information about damages and risks. In order to analyze the SMSs in a dynamic setting, we develop a method for solving optimal control problems when state space is divided into risky and non-risky sub-sets.