The dynamics of optimal environmental regulation (Q1092791)

The problem of environmental control by direct regulatory restrictions on firms' maximum discharge levels is examined. The problem can be viewed as one of optimally selecting this upper bound and of selecting a time at which it comes into force (firms are normally given time to adjust to the new regime). The firm chooses a private-cost minimising adjustment path - and the control authority needs to take account of this in setting the regulatory control. The resulting second-best solution is contrasted to the `first-best' environmental adjustment path.