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Does Stochasticity matter? Dynamic Pigouvian Taxation in an Uncertain Environment

Author

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  • Sandal, Leif Kristoffer

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Steinshamn, Stein Ivar

    (Centre for Fisheries Economics, Institute for Research in Economics and Business Administration (SNF))

Abstract

The effects of discounting, stochasticity, non-linearities and maximum decay upon an optimal corrective tax are analyzed using stochastic dynamic optimization. Optimal corrective taxes are derived as explicit feedback control laws in the presence of both flow and stock externalities when the decay of aggregated pollution is subject to a general stochastic process. This represents an adaptive approach to regulation of the environment. The problem has been solved using a non-linear Hamilton-Jacobi-Bellman equation. The model applied is quite general in the state variable, accumulated pollution, and in the control variable, production. The objective function is to maximize expected social welfare defined as the sum of consumers’ and producers’ surplus adjusted for externalities. Social welfare is not assumed to be separable in production and accumulated pollution. The main result is that the optimal tax is more sensitive to discounting and non-linearities than to stochasticity.

Suggested Citation

  • Sandal, Leif Kristoffer & Steinshamn, Stein Ivar, 2004. "Does Stochasticity matter? Dynamic Pigouvian Taxation in an Uncertain Environment," Discussion Papers 2004/6, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2004_006
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    File URL: http://hdl.handle.net/11250/164070
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    References listed on IDEAS

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    1. Sinclair, Peter J N, 1992. "High Does Nothing and Rising Is Worse: Carbon Taxes Should Keep Declining to Cut Harmful Emissions," The Manchester School of Economic & Social Studies, University of Manchester, vol. 60(1), pages 41-52, March.
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    More about this item

    Keywords

    Global warming; flow and stock externalities; dynamic corrective taxes; stochastic dynamic optimisation;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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