Environmental Policy and Firm Behavior: Abatement Investment and Location Decisions Under Uncertainty and Irreversibility
AbstractThis paper explores abatement investment and location responses to environmental policy, which takes the form of emission taxes or tradeable emission permits and subsidies against the costs of abatement investment, under uncertainty and irreversibility. Uncertainty is associated with output price, environmental policy parameters, or technological parameters. Irreversibility is related to abatement expenses and movements to a new location. Uncertainty is modeled by It“ stochastic differential equations, and the problem is analyzed by using optimal stopping methodologies. Continuation intervals during which firms do not engage in abatement investment or relocate and intervals during which firms take the irreversible decision of undertaking abatement expenses or relocating are defined. Free boundaries are characterized for a variety of cases that include output price uncertainty expressed both in terms of continuous fluctuations of permit prices and unpredictable policy changes, and combined policy and technological uncertainty. An optimal environmental policy is defined as the combination of policy parameters that makes the free boundary corresponding to the profit maximization problem coincide with the free boundary corresponding to a social optimization problem.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0243.
Date of creation: Aug 1999
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Other versions of this item:
- Anastasios Xepapadeas, 2001. "Environmental Policy and Firm Behavior: Abatement Investment and Location Decisions under Uncertainty and Irreversibility," NBER Chapters, in: Behavioral and Distributional Effects of Environmental Policy, pages 281-308 National Bureau of Economic Research, Inc.
- NEP-AGR-1999-08-27 (Agricultural Economics)
- NEP-ALL-1999-08-27 (All new papers)
- NEP-CDM-1999-08-27 (Collective Decision-Making)
- NEP-ENV-1999-08-27 (Environmental Economics)
- NEP-PBE-1999-08-28 (Public Economics)
- NEP-PUB-1999-08-27 (Public Finance)
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