Optimal dynamics of environmental quality in economies in transition1

Environmental pressures in the transition economies of the post‐Soviet era affect not only the quality of life for local populations, but also other key economic issues such as privatization and employment by posing obstacles to their progress. Most studies addressing the environment in transition economies are empirical or analyze the effect of environmental protection on economic variables without first establishing an underlying framework together with the optimal path of environmental quality during the transition. This paper presents such a framework and a policy rule for attainment of the optimal balance between capital and environmental quality in economies in transition. Furthermore, the model shows that pollution taxes or tradable pollution permits are by themselves insufficient to implement the social optimum in a decentralized economy. The results of the model are consistent with depressed economic activity in those economies during an initial phase, and with the diversity of environmental policies in both Central and Eastern Europe (CEE) countries and the Newly Independent States (NIS). JEL classification: Q20, P20, O13.