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

In: Dynamic Optimization in Environmental Economics

Author

Listed:
  • Ben J. Heijdra

    (University of Groningen)

  • Pim Heijnen

    (University of Groningen)

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.

Suggested Citation

  • Ben J. Heijdra & Pim Heijnen, 2014. "Optimal Environmental Policy in the Presence of Multiple Equilibria and Reversible Hysteresis," Dynamic Modeling and Econometrics in Economics and Finance, in: Elke Moser & Willi Semmler & Gernot Tragler & Vladimir M. Veliov (ed.), Dynamic Optimization in Environmental Economics, edition 127, pages 61-85, Springer.
    • Handle: RePEc:spr:dymchp:978-3-642-54086-8_3
    DOI: 10.1007/978-3-642-54086-8_3
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    Cited by:

    1. Ben J. Heijdra & Pim Heijnen, 2021. "Reversible Environmental Catastrophes with Disconnected Generations," De Economist, Springer, vol. 169(2), pages 211-252, May.

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