Optimal dynamic scale and structure of a multi-pollution economy

Abstract

We analyze the optimal dynamic scale and structure of a two-sectoreconomy, where each sector produces one consumption good and one specific pollutant. Both pollutants accumulate at different rates to stocks which damage the natural environment. This acts as a dynamic driving force for the economy. Our analysis shows that along the optimal time-path (i) the overall scale of economic activity may be less than maximal; (ii) the time scale of economic dynamics (change of scale and structure) is mainly determined by the lifetime of pollutants, their harmfulness and the discount rate; and (iii) the optimal control of economic scale and structure may be non-monotonic. These results raise important questions about the optimal design of environmental policies.

The miner and the activist: an Australian parable for our carbon constrained world

“…We can see that such questions are ludicrous and whilst economists may ponder them, they really are impossible to adjudicate. Despite this, some economists persist in presenting us with a model of 'willingness to pay' (see, for example, Amigues et al 2002;Kronenberg and Winkler 2009;Longo et al 2008;Pate and Loomis 1997;Solomon and Johnson 2009;Verbic and Slabe-Erker 2009): that is, asking people what they would be willing to pay to enjoy a pollution-free beach (Baumgärtner et al 2009;Winkler 2006aWinkler , 2006b). While a discussion here is beyond the scope of this paper, there are some obvious limitations to this approach.…”

Optimal Control of Pollutants with Delayed Stock Accumulation

“…In general equilibrium models, instantaneous utility V is often of the second type, but assumed to be additively 7 separable in consumption and environmental quality (e.g., Baumgärtner et al 2007, Goeschl and Perino 2007, and Van der Ploeg and Withagen 1991:…”

“…While some contributions (e.g., Gradus andSmulders 1993, Keeler et al 1972, Van der Ploeg and Withagen 1991, Smith 1977, Goulder and Mathai 2000 analyze steady-state growth in highly aggregated Ramsey-type optimal growth models with environmental pollution, others focus on the complex system dynamics of environmental problems caused by stock pollutants. For example, Falk and Mendelsohn (1993) analyze the optimal emissions of greenhouse gases, Baumgärtner et al (2007) and Moslener and Requate (2007) analyze the dynamic interaction of different stock pollutants, and Goeschl and Perino (2007) investigate optimal R&D expenditures if technologies give rise to stock pollutants. A second strand deals with the delayed accumulation of capital.…”