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

Author

Listed:
  • 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.

Suggested Citation

  • Nathaniel O. Keohane & Benjamin Van Roy & Richard J. Zeckhauser, 2000. "Controlling Stocks and Flows to Promote Quality: The Environment, With Applications to Physical and Human Capital," NBER Working Papers 7727, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:7727
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    References listed on IDEAS

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    Cited by:

    1. Sunil Kumar & Kumar Muthuraman, 2004. "A Numerical Method for Solving Singular Stochastic Control Problems," Operations Research, INFORMS, vol. 52(4), pages 563-582, August.
    2. Stavins, Robert, 2005. "The Effects of Vintage-Differentiated Environmental Regulation," Working Paper Series rwp05-031, Harvard University, John F. Kennedy School of Government.
    3. Ranjan, Ram, 2005. "Environmental Restoration of Invaded Ecosystems: How Much Versus How Often?," 2005 Annual meeting, July 24-27, Providence, RI 19135, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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