Journal #J-10/2003
Optimal Regulation of Natural Resources in the Presence of Irreversible Threshold Effects
Eric Nævdal
Department of Economics & Social Sciences Agricultural University of Norway PO Box 5033, N-1432 Ås, Norway http://www.nlh.no/ior/ e-mail: eric.naevdal@ior.nlh.no

Nævdal, E. (2003): "Optimal Regulation of Natural Resources in the Presence of Irreversible Threshold Effects", Natural Resource Modelling, 16(3):305-333.

Abstract:
Thresholds are an important physical consideration in the regulation of natural resources. This paper is the first to present a complete analytical framework in which to evaluate optimal regulation of a natural resource in the presence of irreversible threshold effects. Necessary conditions are presented for optimal regulation of these problems are presented both for when the threshold has a known location in state-space and for when the location of the threshold is unknown. In the case where the location is known, the literature is corrected on a seemingly minor technical point regarding the behaviour of the co-state variables that turns out to be of considerable importance. For the case when the location of the threshold is not known, it is shownthat thresholds in state-space implies a non-standard risk structure.

Key words: Irreversibility, threshold effects, natural resources, optimal control

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