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Optimal Extractive Taxes Under Demand Uncertainty

Author

Listed:
  • James R. Fain

    (Oklahoma State University)

  • Mary N. Gade

    (Oklahoma State University)

Abstract

The authors develop a two-period duopoly model characterized by demand uncer- Abstract tainty to consider how a state government should tax the extraction of a nonrenewable resource. They demonstrate that if firms are risk averse, they tilt production toward the future and underproduce in the present even more than they would in a world of perfect certainty. Therefore, states should set extractive per-unit taxes such that they increase over time at a rate faster than the interest rate to motivate an increase in production in the present relative to the future .

Suggested Citation

  • James R. Fain & Mary N. Gade, 1992. "Optimal Extractive Taxes Under Demand Uncertainty," Public Finance Review, , vol. 20(2), pages 243-255, April.
    • Handle: RePEc:sae:pubfin:v:20:y:1992:i:2:p:243-255
    DOI: 10.1177/109114219202000207
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    References listed on IDEAS

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