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Abstract

Environmental policymakers must address the adverse effects of a number of pollutants that accumulate in the environment. Goals for the regulation of these damages often involve holding long-term emissions below a level deemed to be "dangerous", or outright banning of offending products or processes along with subsidization of more "green" alternatives. This paper builds upon previous studies by Keeler, Spence, and Zeckhauser (1971) and Tahvonen and Withagen (1996) in addressing the optimal long-term management of an accumulative but assimilatable pollutant through policies that restrict more damaging production processes and thereby induce more benign alternatives. Using a simple general equilibrium approach, we consider the possibility that the assimilative capacity of the environment is diminished and eventually exhausted by pollution accumulation. In this case there is a nonconvexity in the problem that gives rise to multiple potential optima, complicating the characterization of the optimal path and the determination of decentralized policies that can support an optimal outcome. In particular, environmental quality may be preserved or completely degraded in the long term. This makes the question of whether polluting processes or products should be banned more complicated and more interesting. We characterize the circumstances under which a banning policy is consistent with an intertemporally optimizing path, we investigate the sensitivity of optimal solutions to the cost of a clean backstop technology, and we discuss more generally the design of price-based and quantity-based policies for supporting an optimal solution.

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