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On optimal extraction under asymmetric information over reclamation costs

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  • Lappi, Pauli

Abstract

Polluting exhaustible resource extraction ends with costly reclamation and producers have better information about future reclamation costs than the regulator. This paper analyzes optimal contract between the regulator and the mining firm in a two-stage model, in which extraction and pollution generation is followed by reclamation with asymmetric information over reclamation costs. The contract consists of a pollution tax and a mechanism used for cost information revelation, and it extracts all the profit from the highest-cost type, leaves profits for the more efficient types and dictates a reclamation effort that is lower than the complete information effort. It is further shown that the optimal pollution tax under asymmetric information can be lower or higher than the tax under complete information. In addition, the exclusion of the most expensive types is analyzed. The results can help to design policies that improve the existing ones by saving public funds, by improving the state of the environment and by excluding those mining operations that do not produce (net) benefits for the society.

Suggested Citation

  • Lappi, Pauli, 2020. "On optimal extraction under asymmetric information over reclamation costs," Journal of Economic Dynamics and Control, Elsevier, vol. 119(C).
    • Handle: RePEc:eee:dyncon:v:119:y:2020:i:c:s016518892030155x
    DOI: 10.1016/j.jedc.2020.103987
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    More about this item

    Keywords

    Asymmetric information; Dynamic optimization; Exhaustible resources; Optimal contract; Pollution tax; Reclamation; Second-best; Stock pollution;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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