The Control of Environmental Pollution of a Firm

The subject of this survey paper is the behaviour of the profit maximizing entrepreneuer under environmental constraints. In the first part the following question is analyzed: how does the control of pollution affect the optimal investment-employment decisions of a firm? The relevant question connected with the strategies of environmental policy is that of their instruments. For this purpose two versions of the model are considered (FEICHTINGER-LUPTACIK, 1987): model A with emission certificates and model B with environmental standards. The nature of the optimal solution for both a static and a dynamic model is analyzed and an economic interpretation is given. Using the theory of optimal control it can be shown for model A that along the optimal path the increasing expenditure in pollution control is accompanied by an increasing stock of employees. In model B the firm does not abate until the pollution constraint becomes active. In model C which combines the two previous models the firm will abate before the level of pollution hits the given constraint. For this model the question is answered: how large the emission charge must be set such that in a stationary state the emission don’t exceed the environmental standard.