Pollution Control in an Uncertain Environment

The effects of the threat of occurrence of environmental catastrophes on optimal pollution control is considered. Recent analysis of irreversible events is extended to two types of reversible events: single-occurrence and multiple-occurrence (recurrent) events. While it is possible that the threat of irreversible events induces more pollution, we show that reversible events, under quite general conditions, induce more conservation (less pollution). The analysis is carried out via a simple method (the "ho-method") to identify optimal steady states by comparing steady state policies with small variations from them. For recurrent events the optimal state process must approach a unique steady state from any initial level. In this case, the ho-method characterizes the dynamic behavior of the optimal state process without actually solving for it.