Optimal production and abatement policies of a firm (Q1090591)

A pollution control problem from the environmental policy and employment point of view for a profit maximizing firm is investigated applying optimization theory. The problem is formulated in an optimization environment in two different ways: first on the basis of a static nonlinear model A subject to linear inequality constraints, and second on the basis of a dynamic nonlinear model B subject to linear inequality constraints. The Kuhn-Tucker conditions of optimality are derived for the first problem in order to analyse the nature of the optimal solution for which an economic interpretation is also given. On the other hand, optimal control theory is applied to the dynamic problem and it is shown that along the optimal path the increasing expenditure in pollution control is accompanied by an increasing stock of employees. The saddle point property of the equilibrium is established and the relation between the level of pollution in the stationary state and the charge per unit of effluents is derived. A sensitivity analysis of equilibrium values with respect to the changes in the parameters of the models is presented.