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Increase in risk and its effects on welfare and optimal policies in a dynamic setting: The case of global pollution

Kompas, Thomas; Long, Ngo; Grafton, Quentin


This paper studies the effects of an increase in risk on welfare and optimal policies in a stochastic dynamic model of global pollution. In a first step, we focus on the case of a single decision maker, and make use of an approach pioneered by Kimball (2014) for studying the impact of a marginal change in risk in optimal stochastic control models. Using a simple model with only one state variable and one control variable, we show how the optimal carbon tax responds to an increase in risk. It is...[Show more]

CollectionsANU Research Publications
Date published: 2014
Type: Journal article
Source: GENEVA Risk and Insurance Review
DOI: 10.1057/grir.2014.5


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