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Abstract:
Departing from Hotelling's assumption of fixed and known reserves, this paper develops an economic model of additions to proven reserves that explicitly incorporates the effects of expected resource price, cumulative reserves development, and technological progress on reserve additions. The model treats additions to proven oil reserves as output of a production process in which drilling wells is a primary input to transform some of oil-in-place into the economic category of proven reserves. Application of the model to U.S. data for the1950-1995 period provides strong statistical support for the existence of all the three salient effects. We obtain an estimate of the price elasticity of reserve additions (absent from previous studies) which, although statistically highly significant, is rather small. Using this price elasticity estimate, it is shown that if in the face of steady economic growth, and hence oil consumption, U.S. oil import dependence is to be kept from rising in the future, ceteris paribus, a steady oil price increase in the range of 1.5 to 4.5 percent a year is essential.

Key Words: reserves additions, price effect, depletion, technological progress, oil dependence

Abstract:
In a dynamic model of a risk-neutral competitive firm which can lower its pollution emissions per unit of output by building up abatement capital stock, we examine the effect of a higher pollution tax rate on abatement investment both under full certainty and when the timing or the size of the tax increase is uncertain. We show that a higher pollution tax encourages abatement investment if it does not exceed a certain threshold rate. However, akin to Diamond-Mirrless' tax anomaly, it is possible that a higher pollution tax rate results in more pollution. The magnitude uncertainty discourages abatement investment, but at the time of the actual tax increase the abatement investment path may shift either upward or downward. On the other hand, when the timing is uncertain, the abatement investment path always jumps upward, thus suggesting that the effect of magnitude uncertainty on the optimal investment path may be more pronounced than that of timing uncertainty. Further, we show that the ad hoc practice of raising the discount rate to account for the uncertainty leads to underinvestment in abatement capital. We show how the size of this underinvestment bias varies with the future tax increase. Finally, we show that a credible threat to accelerate the tax increase can induce more abatement investment.

Abstract:
In a dynamic model of a risk-neutral competitive firm which can lower its pollution emissions per unit of output by building up abatement capital stock, we examine the effect of a higher pollution tax rate on abatement investment both under full certainty and when the timing or the size of the tax increase is uncertain. We show that a higher pollution tax encourages abatement investment only if it does not exceed a certain threshold rate - a "Laffer-curve" phenomenon. When the size of the tax increase is uncertain, at the time of the tax increase the abatement investment path may shift upward or downward depending on whether the actual tax rate is higher or lower than the firm's expected rate. But, when the time of the tax increase is uncertain, the abatement investment path always jumps upward. Further, except in very special cases, there is no certainty-equivalent discount rate that the firm can use to optimally handle the timing uncertainty. We identify the direction of the abatement investment bias resulting from such an erroneous practice. We show that a credible threat to accelerate the tax increase can further boost the firm's abatement investment.

Abstract:
This paper sheds further light on the relationships between the current-value Hamiltonian, net national product (NNP), and sustainability condition in the context of a cake-eating economy. It shows that the usual interpretation of the current-value Hamiltonian as the maximum sustainable consumption/utility level is not correct and that a general condition for sustainability in this sense is the stationarity of the current-value Hamiltonian. It also derives an explicit relationship between this condition and the condition for sustainability in the sense of "keeping the value of wealth intact." It then finds that while a cake-eating economy can never be sustainable in the former sense, it will be sustainable in the latter sense provided the preferences are presented by a logarithmic utility function. Further, the paper shows that, contrary to common belief, NNP is not, in general, equal to the current-value Hamiltonian, except for the highly special case of a linear utility function. It argues that, even when correctly adjusted to account for natural capital depreciation, NNP can still be a notoriously misleading indicator of true level of well-being because, depending on the degree of society's aversion to intergenerational inequality, it can underestimate or overestimate the current-value Hamiltonian along an optimal policy.

sustainability, current-value Hamiltonian, net national product

Abstract:
I focus on two alternative concepts of sustainability dominating the literature: (i) maximum permanently maintainable consumption level (Fisherian income) and (ii) the amount of consumption that leaves total value of wealth intact (Hicksian income). In the context of a pure exhaustible resource economy, I derive an explicit relationship between the two sustainability criteria and show that while such an economy is not sustainable in the former sense, it is in the latter sense provided social preferences are represented by a logarithmic utility function. I also derive the implications of the two concepts for greening of national income. Finally, I show the range of values of the parameters of the model for which the utilitarian optimal path can be close to paths satisfying the alternative sustainability criteria, suggesting that such outcomes are less likely for very poor resource-dependent countries than for the rich ones.

Sustainability, Resource Stock Value, Optimal Consumption Path, Green Accounting

Abstract:
This paper shows that, for dynamic optimizing economies with different types of natural resource, environmental, and human-made capital stocks, a necessary and sufficient condition for permanently sustaining an optimal utility/consumption level is the stationarity of the current-value Hamiltonian. For economies whose development is not exogenously and directly affected by time (i.e., time-autonomous economies), this stationarity condition generalizes Dixit et al.'s (1980) "zero-net-aggregate-investment" rule of sustain-ability, which in turn generalizes Solow-Hartwick's sustainability rule. For non-autonomous economies, the stationarity condition is not generally fulfilled, and the current-value Hamiltonian under (over) estimates the true welfare level by an amount equal to the discounted value of the net "pure time effect." For the non-autonomous case of a time-dependent utility discount rate, a general condition on the discount rate function (of which the hyperbolic discount rate function is a special case) upholds the results obtained for autonomous cases. The paper concludes with a discussion of policies that promote both optimality and sustainability objectives.

Abstract:
This paper shows that, for dynamic optimizing economies with different types of natural resource, environmental, and human-made capital stocks, a necessary and sufficient condition for permanently sustaining an optimal utility/consumption level is the stationarity of the current-value Hamiltonian. For economies whose development is not exogenously and directly affected by time (i.e., time-autonomous economies), this stationarity condition generalizes Dixit et al.'s (1980) zero-net-aggregate-investment rule of sustainability, which in turn generalizes Solow-Hartwick's sustainability rule. For non-autonomous economies, the stationarity condition is not generally fulfilled, and the current-value Hamiltonian under (over) estimates the true welfare level by an amount equal to the discounted value of the net pure time effect. For the non-autonomous case of a time-dependent utility discount rate, a general condition on the discount rate function (of which the hyperbolic discount rate function is a special case) upholds the results obtained for autonomous cases. The paper concludes with a discussion of policies that promote both optimality and sustainability objectives.

Sustainablity conditions, Optimal path, Hamiltonian value, Stationarity condition, Hyperbolic discounting, Green accounting, Intergenerational equity, Social welfare

Abstract:
Industrialists often claim that, by rendering firms unprofitable and hence forcing them out of business, stricter emissions standards reduce the industry output and competition. This paper considers situations where firms' pollution reduction increases the industry demand, but because of inability to co-ordinate their emissions reductions, and thus free riding problem, they are unable to act in their own collective interest. For such situations, the paper studies the effects of emissions standards on the equilibrium in an oligopoly market both at the firm and industry level and in the long run as well as short run. It shows conditions under which a stricter standard leads to a larger number of firms in the industry, a greater industry output, and a lower total pollution in the long run; and to higher levels of firms' profits and output in the short run. It also shows that for the industry to survive, a minimum pollution standard may be necessary.

environmental standard, abatement cost, demand effect, industry output

Abstract:
This paper analyses budget-constrained, nonpoint source (NPS) pollution control with costly information acquisition and learning. To overcome the inherent ill-posed statistical problem in NPS pollution data the sequential entropy filter is applied to the sediment load management program for Redwood Creek, which flows through Redwood National Park in northwestern California. We simulate the dynamic budget-constrained management model with information acquisition and learning, and compare the results with those from the current policy. The analysis shows that the manager can reallocate resources from treatment effort to information acquisition, which in turn increases overall treatment effectiveness, and reduces sediment-related damage.

Nonpoint Source Pollution, pollution control budget, information acquisition, treatment effectiveness, entropy

Abstract:
The relationships among the Hamiltonian, NNP, and the level of sustainable consumption/utility have been widely misunderstood. This paper dispels the misconceptions and provides further new insight into these relationships. We show generally that for autonomous dynamic optimizing economies, a necessary and sufficient condition for sustainability is the stationarity of the current-value Hamiltonian. For autonomous cases, this stationarity condition generalizes Dixit et al.'s (1980) "zero-net-aggregate-investment" rule of sustainability, which in turn generalizes Solow-Hartwick's sustainability rule. For non-autonomous cases, however, except when the net "pure time effect" is constant over time, the stationarity condition is unfulfilled. In non-autonomous cases, Weitzman's (1976) "stationary equivalence" result does not hold, and the current-value Hamiltonian will underestimate (overestimate) the true welfare level when the net "pure time effect" is positive (negative). However, for the special non-autonomous case of a time-dependent utility discount rate we obtain a condition on the discount rate function that upholds the results obtained for autonomous cases. In turn, this condition extends Michel's (1982) transversality condition for the infinite-horizon autonomous control problems to problems with time dependent discount rates.

Sustainability, Current-value Hamiltonian, Net National Product

Abstract:
We develop and estimate an econometric model of the relationship between several local and global air and water pollutants and economic development while allowing for critical aspects of the socio-political-economic regime of a State. We obtain empirical support for our hypothesis that democracy and its associated freedoms provide the conduit through which agents can exercise their preferences for environmental quality more effectively than under an autocratic regime, thus leading to decreased concentrations or emissions of pollution. However, additional factors such as income inequality, age distribution, and urbanization may mitigate or exacerbate the net effect of the type of political regime on pollution, depending on the underlying societal preferences and the weights assigned to those preferences by the State.

Political institutions, societal preferences, economic development, environmental quality

Abstract:
We study a firm's optimal lobby behavior and its effect on investment in pollution abatement capital. We develop a dynamic framework where a representative firm can invest in both abatement and lobby capital in response to a possible future increase in pollution tax. We show that when the firm lobbies against the scale of the tax increase at a predetermined date, it will act like an occasional lobbyer by investing a lump-sum (optimal) amount in the lobby capital only at that date. But, to delay the new tax, it will act like a habitual lobbyer by investing continuously and at increasing rates over an optimal time period. We show that lobby expenditure crowds out investment in abatement capital and that this effect is stronger the more efficient is the lobbying activity. Further, we show that while uncertainty about the magnitude of the tax reduces the firm's incentive to lobby, uncertainty about the timing of the new tax increases it.

Abstract:
We develop and estimate an econometric model of the relationship between several local and global air pollutants and economic development while allowing for critical aspects of the socio-political-economic regime of a State. We obtain empirical support for our hypothesis that democracy and its associated freedoms provide the conduit through which agents can exercise their preferences for environmental quality more effectively than under an autocratic regime, thus leading to decreased concentrations or emissions of pollution. However, additional factors such as income inequality, age distribution, education, and urbanization may mitigate or exacerbate the net effect of the type of political regime on pollution, depending on the underlying societal preferences and the weights assigned to those preferences by the State.

Political institutions, societal preferences, economic development

Abstract:
This paper takes sustainability to be a matter of intergenerational welfare equality and examines whether an optimal development path can also be sustainable. It argues that the general "zero-net-aggregate-investment" condition for an optimal development path to be sustainable in the sense of the maximin criterion of intergenerational justice is too demanding to be practical, especially in the context of developing countries. The maximin criterion of sustainability may be more appealing to the rich advanced industrial countries, but is too costly and ethically unreasonable for developing nations as it would act as an intergenerational "poverty equalizer". The paper suggests that a compromise development policy that follows the optimal growth approach but adopts certain measures to mitigate the intergenerational and intragenerational welfare inequalities may better serve these countries. Some of the principal elements of such a policy are highlighted.

sustainability, intergenerational equity, optimality, discounting, development policy

Abstract:
Recognizing that people value employment not only to earn income to satisfy their consumption needs, but also as a means to gain socio-psychological (nonpecuniary) benefits, we show that once nonpecuniary work incentives are incorporated into standard labor supply theory, (i) the wage rate under-estimates (over-estimates) the true value of nonwork/leisure time when work has nonpecuniary benefits (costs), (ii) nonpecuniary benefits can be a substitute for monetary wages as work incentives, (iii) at very low wage rates, work can become a net source of utility, and (iii) the shape of labor supply curve differs from standard theory. We also identify conditions under which a greater nonpecuniary work incentive generates a larger individual labor supply, and examine the effects of non-wage income on labor supply both for paid and voluntary work.

Nonpecuniary incentives, Labor supply, Non-wage income, Voluntary work

Abstract:
This paper analyzes the efficient management of nonpoint source pollution (NPS) under limited pollution control budget and incomplete information inherent in NPS pollution. By incorporating information acquisition into a pollution control model, it focuses on the tradeoff between data collection and treatment efforts and derives conditions under which (i) a favorable change in the state of treatment cost at one site may lead to an increase in treatment level at another site, (ii) a higher data collection cost induces more data collection, and (iii) an increase in information productivity leads to an increase in the level of data collection. A numerical simulation of the model illustrates how in managing NPS pollution the value of information acquisition depends on the degree of heterogeneity of polluting sites.

Abstract:
Exhaustion of a natural resource stock may be a rational choice for an individual and/or a community, even if a sustainable use for the resource is feasible and the resource users are farsighted and well informed on the ecosystem. We identify conditions under which it is optimal not to sustain resource use. These conditions concern the discounting of future benefits, instability of social system or ecosystem, nonconvexity of natural growth function, socio-psychological value of employment, and strategic interaction among resource users. The identification of these conditions can help design policies to prevent unsustainable patterns of resource use.

Renewable resource management, Sustainability, Finite-time exhaustion, Optimal path, Policy implications

Abstract:
Recognizing that people value employment not only to earn income to satisfy their consumption needs but also as a means of community involvement that provides socio-psychological (non-pecuniary) benefits, we show that once the non-pecuniary benefits of employment are incorporated in the standard individual's utility function, then at very low income levels employment can be a source of utility, inducing individuals to supply labor to the extent possible. We also show the conditions under which a greater non-pecuniary effect of employment generates a larger individual labor supply.

Non-pecuniary effects, Employment value, Labor supply

Abstract:
We adapt a biogeochemical model of an agroecosystem to account for optimal economic behavior on the part of agricultural producers. Two institutional management regimes are considered: one in which a representative producer does not account for stock pollution caused by use of agricultural inputs, and one in which the externality is internalized. Comparative statics of the steady state of the former problem are analyzed in order to gain insight into effects of potential policy and technological changes. Results show that a more realistic ecosystem component that includes nutrient cycling can qualitatively change optimal management practices relative to a one-state representation, potentially rendering systems "unsustainable" under some criteria and leading to policy instruments that exacerbate, rather than mitigate, external damages or the resource base. Moreover, the qualitative effect of changes in model parameters are not necessarily uniform across different agricultural systems, implying that a prescription for so-called "sustainable" management under one system may have unintended consequences for another system.

Agroecosystem, dynamic model, optimal control, stock externality, comparative statics, technological change

Abstract:
We assume that people value employment not only to earn income to satisfy their consumption needs but also as a means of community/social involvement that provides socio-psychological (non-pecuniary) benefits. We show that the latter incentive can encourage full employment harvesting resources and explain why poor resource-based communities may exhaust a natural resource in a finite time even if there is a sustainable path of resource consumption available. We show that communities could sustain their natural resources by using outside-the-community employment and economic diversification, but, to be effective, such policies must ensure that the outside wage rate and the initial capital stock are above certain minimum levels, which will be higher the longer these policies are delayed.

Non-pecuniary effects, social norm, employment value, resource extinction, sustainability

Abstract:
In a duopoly industry with environmentally differentiated products, we examine the effects of introducing a mandatory environmental quality standard on firms' environmental quality choices, profits, and the average environmental quality offered by the industry. We show that at low standards, both firms choose to overcomply regardless of the standard level. At intermediate standards, the mandatory standard can reduce the profit of the low-cost firm while increasing that of the high-cost firm, and that it can lower the industry's average environmental quality below what it would be without the standard.

Duopoly, Environmental Quality, Mandatory Environmental Standard, Overcompliance, Product Differentiation

Abstract:
Using the numerical technique of value iteration, this paper imposes several sustainability constraints on a simple multi-sector agroecosystem model, and provides analysis of the costs tradeoffs of the product and externality affected sectors both within and between generations. Results show that internalization of a stock externality is insufficient for intergenerationally equitable welfare paths, while sustaining a physical resource over time in the interests of equitability can result in a less equitable distribution of welfare across generations. Furthermore, a value sustainability constraint imposed on the social welfare maximization problem acts as a welfare transfer mechanism from the productive sector to the sector affected by the externality, but implies growth in profits for the productive sector and declining utility for the non-productive sector.

Intergenerational equity, social welfare, stock externality, sustainability criteria, Chebychev polynomial, constrained dynamic optimization

Abstract:
The paper focuses on two alternative concepts of sustainability dominating the literature: (i) maximum permanently maintainable consumption level (Fisherian income) and (ii) the amount of consumption that leaves total value of wealth intact (Hicksian income). In the context of a pure exhaustible resource economy, the author derives an explicit relationship between the two sustainability criteria and shows that while such an economy is not sustainable in the former sense, it is in the latter sense provided social preferences are represented by a logarithmic utility function. The implications of the two concepts for greening of national income are derived. Finally, the paper shows the range of values of the parameters of the model for which the utilitarian optimal path can be close to paths satisfying the alternative sustainability criteria, suggesting that such outcomes are less likely for very poor resource-dependent countries than for the rich ones.

Abstract:
Faced with divergent opinions among consumers on the use of genetically modified (GM) foods, Canada has adopted a voluntary labelling approach for non-GM foods, whereas the European Union has a mandatory labelling policy for GM foods. Interestingly, both labelling systems have resulted in very little, if any, additional consumer choice. Using an analytical model, we show that the coexistence of GM and non-GM products at the retail level depends on the labelling policy, consumer perceptions, and the type of product. Although voluntary labelling tends to favour the use of GM products, it is more likely to provide consumer choice.

(Confrontés à des opinions publiques divergentes sur l'usage des aliments génétiquement modifiés (GM), le Canada a adopté une politique d'étiquetage volontaire pour les aliments non-GM alors que l'Union Européenne a mis en place une politique d'étiquetage obligatoire des aliments GM. Curieusement, ces deux systèmes d'étiquetage n'ont pas réellement permis de faciliter le choix des consommateurs. A l'aide d'un modèle analytique, nous démontrons que la coexistence des produits GM et non-GM au niveau du commerce de détail dépend de la politique d'étiquetage, de la perception des consommateurs, et du type de produit. Bien que l'étiquetage volontaire ait tendance à favoriser l'usage des produits GM, cette approche est plus à même de faciliter le choix du consommateur que l'étiquetage obligatoire.)

Abstract:
This paper uses a directional output distance function to estimate a multi-output production frontier for a sample of experimental plots grown for the Sustainable Agriculture Farming Systems project at the University of California, Davis. Cross-sectional technical efficiency indices are estimated that take into account two proxies for undesirable output: number of trips across a field as a proxy for air pollution and/or soil erosion, and pints of pesticides applied to account for potential leaching and/or health risks. Shadow price estimates based on marginal rates of transformation range from $8-$21 for trips, while shadow prices for pints of pesticides averaged $23-$37.

Environmental efficiency index, shadow price, directional distance function

Abstract:
The paper examines the optimal saving policy for a small exhaustible resource-exporting economy (ERE) that has an exhaustible asset and a reproducible capital stock. It shows that, both in magnitude and time profile, the optimal saving policy for an ERE sharply differs from (a) that of a nonextractive economy and (b) that derived from the conventional models of growth with exhaustible resources. These differences arise from the specific economic features that distinguish the small resource-exporting developing economies both from other developing economies and from mature industrial ones. For a wide range of plausible parameter values, comparisons of computed optimal saving paths with actual savings rates of selected EREs suggest substantial deficiencies in their savings rates.