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

24 Pages Posted: 18 Jul 2011

See all articles by Fabien Prieur

Fabien Prieur

INRA-LAMETA, Université Montpellier I

Mabel Tidball

French National Institute for Agricultural Research (INRA) - Research Center in Montpellier

Cees Withagen

Free University of Amsterdam; Tilburg University

Date Written: July 18, 2011

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

JEL Classification: Q300, Q530, C610

Suggested Citation

Prieur, Fabien and Tidball, Mabel and Withagen, Cees A. M., Optimal Emission-Extraction Policy in a World of Scarcity and Irreversibility (July 18, 2011). CESifo Working Paper Series No. 3512. Available at SSRN: https://ssrn.com/abstract=1888166

Fabien Prieur

INRA-LAMETA, Université Montpellier I ( email )

27 Rue Marcoz
Chambéry, 73011
France

Mabel Tidball

French National Institute for Agricultural Research (INRA) - Research Center in Montpellier ( email )

2 place Viala
Montpellier, Cedex 01 34060
FRANCE
04 99 61 22 45 (Phone)
04 67 54 58 05 (Fax)

Cees A. M. Withagen (Contact Author)

Free University of Amsterdam ( email )

Tinbergen Institute De Boelelaan 1105
1081 HV Amsterdam
Netherlands

Tilburg University ( email )

Postbus 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

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