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Controlling Stocks and Flows to Promote Quality: The Environment, With Applications to Physical and Human Capital

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  • Nathaniel O. Keohane
  • Benjamin Van Roy
  • Richard J. Zeckhauser

Abstract

Our analysis melds two traditional approaches to promoting quality. The first is restoring the stock of quality. The second is curbing its flow of deterioration. Although both approaches are widely used in real world settings, analytic models have tended to focus on one strategy or the other. We consider a class of problems, which we call SFQ' problems, in which both stocks and flows can be controlled to promote quality. We develop our results in the context of environmental quality, drawing on real-world examples from atomic wastes to zebra mussels. But the lessons are general, and we show how they apply to promoting the quality of both physical and human capital. We first study optimal policies in the limiting cases when only abatement or restoration is possible. We then focus on the full SFQ world, where both approaches can be used. We show that the optimal policy employs both instruments. Moreover, when combined optimally, neither strategy takes the form it would in the absence of the other.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7727.

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Date of creation: Jun 2000
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Handle: RePEc:nbr:nberwo:7727

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Cited by:
  1. Stavins, Robert, 2005. "The Effects of Vintage-Differentiated Environmental Regulation," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp05-031, Harvard University, John F. Kennedy School of Government.
  2. Ranjan, Ram, 2005. "Environmental Restoration of Invaded Ecosystems: How Much Versus How Often?," 2005 Annual meeting, July 24-27, Providence, RI, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 19135, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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