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Optimal Allocation of Capital between Production and Emission Control

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  • G Fishelson

    (Department of Economics, Tel Aviv University, Ramat Aviv, Israel)

Abstract

The resources of society that are available for investment are limited. The investment decision of a firm in a perfect capital market is aimed towards profit maximization. In both cases the optimal decisions are based upon expected outcomes when the outcomes are uncertain. Furthermore it is shown that when the degree of uncertainty changes, the optimal decision depends upon the behaviour of the marginal utilities of the outcomes. These general propositions are demonstrated and the optimal solution is presented for the specific case in which the outcome is environmental quality. Environmental quality is introduced explicitly into the social utility function and implicitly into the utility-from-profits function via a tax on the firm's contribution to environmental quality.

Suggested Citation

  • G Fishelson, 1977. "Optimal Allocation of Capital between Production and Emission Control," Environment and Planning A, , vol. 9(4), pages 439-447, April.
    • Handle: RePEc:sae:envira:v:9:y:1977:i:4:p:439-447
    DOI: 10.1068/a090439
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    References listed on IDEAS

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    1. Karl Borch, 1968. "General Equilibrium in the Economics of Uncertainty," International Economic Association Series, in: Karl Borch & Jan Mossin (ed.), Risk and Uncertainty, chapter 0, pages 247-264, Palgrave Macmillan.
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