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

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

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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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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  1. repec:cup:cbooks:9780521297615 is not listed on IDEAS
  2. Andrew B. Abel & Janice C. Eberly, 1993. "A Unified Model of Investment Under Uncertainty," NBER Working Papers 4296, National Bureau of Economic Research, Inc.
  3. John Haltiwanger & Russell Cooper, 1992. "The Aggregate Implications Of Machine Replacement: Theory And Evidence," Working Papers 92-12, Center for Economic Studies, U.S. Census Bureau.
  4. Robert S. Pindyck, 1986. "Irreversible Investment, Capacity Choice, and the Value of the Firm," NBER Working Papers 1980, National Bureau of Economic Research, Inc.
  5. Keeler, Emmett & Spence, Michael & Zeckhauser, Richard, 1972. "The optimal control of pollution," Journal of Economic Theory, Elsevier, vol. 4(1), pages 19-34, February.
  6. Yoram Ben-Porath, 1967. "The Production of Human Capital and the Life Cycle of Earnings," Journal of Political Economy, University of Chicago Press, vol. 75, pages 352.
  7. Sanford J. Grossman & Guy Laroque, 1987. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," NBER Working Papers 2369, National Bureau of Economic Research, Inc.
  8. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
  9. Plourde, Charles & Yeung, David, 1989. "A model of industrial pollution in a stochastic environment," Journal of Environmental Economics and Management, Elsevier, vol. 16(2), pages 97-105, March.
  10. Phillips, Carl V. & Zeckhauser, Richard J., 1998. "Restoring Natural Resources with Destination-Driven Costs," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 225-242, November.
  11. Falk Ita & Mendelsohn Robert, 1993. "The Economics of Controlling Stock Pollutants: An Efficient Strategy for Greenhouse Gases," Journal of Environmental Economics and Management, Elsevier, vol. 25(1), pages 76-88, July.
  12. Caputo, Michael R & Wilen, James E, 1995. "Optimal Cleanup of Hazardous Wastes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 217-43, February.
  13. Smith, Vernon L, 1972. "Dynamics of Waste Accumulation: Disposal Versus Recycling," The Quarterly Journal of Economics, MIT Press, vol. 86(4), pages 600-616, November.
  14. C. G. Plourde, 1972. "A Model of Waste Accumulation and Disposal," Canadian Journal of Economics, Canadian Economics Association, vol. 5(1), pages 119-25, February.
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