Optimal Management of Durable Pollution

Sudhir A. Shah
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Sudhir A. Shah: Delhi School of Economics

No 113, Working papers from Centre for Development Economics, Delhi School of Economics

Abstract: This paper studies an incompletely informed regulator's problem of inducing a firm producing durable pollution to adopt a socially optimal pollution storage technology. We construct a sparse, yet flexible, theoretical model that can be applied directly to concrete situations as it is stated explicitly in terms of statistical parameters. Next, we show the existence of an optimal regulatory contract and examine its qualitative features for one of the many regulatory problems suggested by the general model. Our model extends the standard inventory model by making the firm's storage technology a strategic choice induced by the regulatory contract. Moreover, by providing a structural model of the firm, our model generates useful information that has to be assumed in an abstract regulatory model.

Keywords: regulation; durable pollution; stochastic control; incomplete information (search for similar items in EconPapers)
JEL-codes: C61 D82 D92 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2003-01
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