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.
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