Optimal Environmental Policy in the Presence of Multiple Equilibria and Reversible Hysteresis

Ben J. Heijdra () and Pim Heijnen
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Ben J. Heijdra: University of Groningen

A chapter in Dynamic Optimization in Environmental Economics, 2014, pp 61-85 from Springer

Abstract: Abstract We study optimal environmental policy in an economy-ecology model featuring multiple stable steady-state ecological equilibria. The policy instruments consist of public abatement and a tax on the polluting production input, which we assume to be the stock of capital. The isocline for the stock of pollution features two stable branches, a low-pollution (good) and a high-pollution (bad) one. Assuming that the ecology is initially located on the bad branch of the isocline, the ecological equilibrium is reversibly hysteretic and a suitably designed environmental policy can be used to steer the environment from the bad to the good equilibrium. We study both first-best and second-best social optima. We show that, compared to capital taxation, abatement constitutes a very cheap instrument of environmental policy.

Keywords: Capital Stock; Social Planner; Social Optimum; Abatement Activity; Abatement Policy (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/978-3-642-54086-8_3

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