Abstract
Environmental consequences of natural resource exploitation often entail threats of future occurrences of detrimental abrupt events rather than (or in addition to) inflicting a damage gradually. The possibility of abrupt occurrence of climate-change related calamities is a case in mind. The uncertainty associated with the realization of these threats and their public-bad nature complicate the design of optimal economic response. We derive a Pigouvian hazard tax schedule that implements the socially optimal outcome. The tax is based on the expected cost of the hazard-generating activities and serves to reduce hazardous emissions well in advance of the catastrophic occurrence. A numerical example illustrates possible effects of the proposed regulation scheme. Implications for climate policy are discussed.
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Tsur, Y., Zemel, A. Regulating environmental threats. Environ Resource Econ 39, 297–310 (2008). https://doi.org/10.1007/s10640-007-9127-2
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DOI: https://doi.org/10.1007/s10640-007-9127-2