Regulating environmental threats

Yacov Tsur, Amos Zemel

Research output: Contribution to journalArticlepeer-review

23 Scopus citations

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.

Original languageEnglish
Pages (from-to)297-310
Number of pages14
JournalEnvironmental and Resource Economics
Volume39
Issue number3
DOIs
StatePublished - 1 Mar 2008

Keywords

  • Abrupt event
  • Climate change
  • Emission
  • Hazard rate
  • Pigouvian tax
  • Regulation
  • Uncertainty

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