September 25, 2011

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

by Fabien Prieur, Mabel Tidball and Cees Withagen

- 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.

Prieur, F., M. Tidball and C. Withagen (2011). "Optimal Emission-Extraction Policy in a World of Scarcity and Irreversibility." CESifo Working Paper No. 3512, Jul 2011.