Optimal emission-extraction policy in a world of scarcity and irreversibility |
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| Institution: | 1. LAMETA, University Montpellier I and INRA, France;2. INRA-LAMETA, France;3. VU University Amsterdam and Tinbergen Institute, Netherlands;1. CSIR-National Physical Laboratory, Dr. K. S. Krishnan Marg, New Delhi 110012, India;2. Academy of Scientific and Innovative Research (AcSIR), CSIR-HRDC Campus, Postal Staff College Area, Sector 19, Kamla Nehru Nagar, Ghaziabad, Uttar Pradesh 201002, India;3. National Centre for Antarctic and Ocean Research, Head Land Sada, Vasco-da-Gama, Goa 403804, India;1. Women''s Equity in Access to Care & Treatment, Chinle, AZ, USA;2. Kigali Imbereheza Project, Kigali, Rwanda;3. Women''s Equity in Access to Care & Treatment, Boston, MA, USA;4. Department of Medicine, University of Illinois, Chicago, Chicago, IL, USA;5. Rwanda Bio-Medical Center/Ministry of Health, Kigali, Rwanda;1. College of Chemistry and Chemical Engineering, Henan University, Kaifeng 475004, China;2. Key Laboratory for Special Functional Materials of the Ministry of Education, Henan University, Kaifeng 475004, China;3. Ian Wark Research Institute, University of South Australia, Mawson Lakes, SA 5095, Australia;1. University of Neuchâtel, Department of Economics and Business, Switzerland;2. ETH Zurich, Chair for Integrative Risk Management and Economics, Switzerland;3. Massachusetts Institute of Technology, Joint Program on the Science and Policy of Global Change, USA;4. Economics for the Environment Consultancy (EFTEC), London, UK;1. Department of Law, Politics and Society, University of Palermo, Palermo, Italy;2. Department of Agricultural Economics, Purdue University, West Lafayette, IN 47907-2056, United States;3. Department of Economics, University of Miami, Miami, FL 33124, United States |
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| Abstract: | This paper extends the classical exhaustible-resource/stock-pollution model with irreversibility of pollution decay, meaning that after reaching some threshold there is no decay of the pollution stock. 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 as 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. We show that it is never optimal for the economy to stay at the threshold for a while before entering the irreversible region. The optimality analysis is then illustrated by means of a calibrated 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 resources, irreversible policies outperform reversible programs. |
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| Keywords: | Non-renewable resource Irreversible pollution Optimal policy |
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