Intertemporal effects of environmental mandates

Abstract

Environmental mandates can impose large costs on the businesses that must comply with them. Understanding the effects of those costs on production decisions may require a dynamic framework if environmental damages (and the costs of complying with mandates) depend on cumulative production or the passage of time. This paper focuses on the time dimension of general categories of fixed and variable costs arising from different types of mandates. The paper develops an optimal control model to predict how such costs may jointly affect current production rates, plant closure dates, and cumulative production. Theoretical results, derived from the comparative statics of the system of equations describing the solution to that model, identify circumstances in which the policy goals of greater production and greater environmental protection may not allways be at odds. Copyright Kluwer Academic Publishers 1997environmental management, firm behavior, intertemporal choice,

Optimal plans and timing under additive transformations to rewards

“…Contributions to various strands of the deterministic control literature have shown these conclusions to be in need of modification. For example, Farmer (1997) modelled environmental mandates as fixed and variable costs and showed how optimal production decisions and closure dates were affected by the nature of the particular mandate. In the natural resource literature, Schmalensee (1976) solved what is more or less the prototypical nonrenewable resource extraction problem with the addition of a flow of avoidable fixed costs.…”