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Pollution Externality and Pollution Abatement Capital: A Closed-Form Solution for the Investment Rate of a Green Firm with Uncertainty and IrreversibilityEnrico SaltariUniversity of Rome I - Department of Public Economics Giuseppe TravagliniUniversità degli Studi di Urbino - Department of Economics October 7, 2010 USAEE Working Paper No. 10-045 Abstract: This paper focuses on environmental policies aimed at rising investment in pollution abatement capital. Capital irreversibility is not postulated but endogenized using a quadratic adjustment cost function. We assume that ecological uncertainty, i.e. uncertainty over the dynamics of pollution, affects firm investment decisions. Closed-form solutions for the investment and value of a green firm are derived, showing that irreversibility reduces its fundamental value. The effects of environmental policies are investigated considering taxes on polluting inputs and subsidies to reduce the cost of abatement capital. Environmental policies promoted to enforce abatement capital may generate the unexpected result of reducing the abatement investment rate.
Number of Pages in PDF File: 32 Keywords: Pollution externality, ecological uncertainty, irreversibility, investment decisions, environmental policy JEL Classification: E22, L51, H23, Q28 working papers seriesDate posted: October 8, 2010Suggested CitationContact Information
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