April 17, 2011

Pollution Control: When, and How, to be Precautious

by Stergios Athanassoglou and Anastasios Xepapadeas

- The precautionary principle (PP) applied to environmental policy stipulates that, in the presence of physical uncertainty, society must take robust preventive action to guard against worst-case outcomes. It follows that the higher the degree of uncertainty, the more aggressive this preventive action should be. This normative maxim is explored in the case of a stylized dynamic model of pollution control under Knightian uncertainty. We show that optimal investment in damage control is always increasing in the degree of uncertainty, thus confirming the conventional PP wisdom. Optimal mitigation decisions, however, need not always comport with the PP and we provide analytical conditions that sway the relationship one way or the other.

Athanassoglou, S. and A. Xepapadeas (2011). "Pollution Control: When, and How, to be Precautious." FEEM Note di lavoro No. 2011.018, Mar 2011.